CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties
A bond has a modified duration of 6.0 and a convexity of 80. For a 50 bp decrease in yield, the convexity adjustment to the estimated percentage price change is closest to:
The convexity adjustment is about 0.10%. It equals one-half times convexity times the squared yield change: 0.5 × 80 × 0.005² = 0.001. Leaving out the one-half or the squaring of the yield change produces the larger, incorrect values.
- A0.10%Correct
- B0.20%
- C0.40%
Explanation
Convexity adjustment = 0.5 × 80 × (0.005)^2 = 0.5 × 80 × 0.000025 = 0.001, or 0.10%. Omitting the 0.5 gives 0.20%. Failing to square the yield change gives 80 × 0.005 = 0.40%, which is also wrong.
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