Skip to content

FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

A 1,000,000 bond position has modified duration of 8 and convexity of 90. Yields fall by 200 basis points. What is the dollar contribution of the convexity term to the estimated change in value?

The convexity contribution is +18,000. It equals one-half times 90 times the squared yield change of 0.02, which is 0.018, applied to 1,000,000. Convexity adds value whether yields rise or fall, so the sign is positive even though the duration effect here is also a gain.

  1. A+18,000Correct
  2. B+36,000
  3. C+1,800
  4. D-18,000

Explanation

Convexity term = 0.5×C×(Δy)²×Value = 0.5×90×0.0004×1,000,000 = 18,000. It is positive for yield moves in either direction, so -18,000 has the wrong sign. 36,000 omits the one-half factor, and 1,800 is a decimal scaling error.

Did you get it right without looking?

One question tells you little. A timed set on Applying Duration, Convexity, and DV01 shows your real accuracy, how long you take and where you lose marks.

Practise Applying Duration, Convexity, and DV01Free diagnostic mock

More Applying Duration, Convexity, and DV01 questions