CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties
A bond has a modified duration of 6.00 and a convexity of 50.0. If its yield to maturity rises by 100 bps, the approximate percentage price change using both duration and convexity is closest to:
The approximate price change is -5.75%. The duration effect is -6.00%, and the convexity adjustment adds +0.25% (0.5 x 50 x 0.0001), so the combined estimate is a smaller decline than duration alone predicts.
- A-5.75%Correct
- B-5.50%
- C-6.25%
Explanation
Change = -6.00(0.01) + 0.5(50)(0.01)^2 = -6.00% + 0.25% = -5.75%. Using duration alone gives -6.00%, and subtracting the convexity term instead of adding it gives -6.25%.
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