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CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties

A bond has a modified duration of 6.00 and a convexity of 50. Ignoring higher-order terms, if its yield rises by 100 bps, the bond's approximate percentage price change is closest to:

The approximate price change is −5.75%. Duration alone gives −6.00% (6.00 times 1%), and the convexity adjustment adds back 0.5 times 50 times 0.0001, which is 0.25%. The net change is therefore −5.75%.

  1. A−6.00%
  2. B−5.75%Correct
  3. C−5.50%

Explanation

ΔP/P ≈ −ModDur×Δy + ½×Convexity×(Δy)² = −6.00×0.01 + 0.5×50×0.0001 = −0.0600 + 0.0025 = −0.0575, or −5.75%. −6.00% ignores convexity. −5.50% subtracts the convexity term wrongly sized (doubling it).

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