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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

A bond has a modified duration of 6.50 and an approximate convexity of 60.0. Yield-to-maturity rises by 100 bps. The estimated percentage price change using both duration and convexity is closest to:

The estimated price change is about -6.20%. Duration gives -6.50% (6.50 x 1%), and the convexity adjustment adds 0.5 x 60 x 0.0001 = 0.30%, so the total is -6.20%. Ignoring convexity gives -6.50%.

  1. A-6.20%Correct
  2. B-5.90%
  3. C-6.50%

Explanation

Duration effect = -6.50 x 0.01 = -6.50%. Convexity effect = 0.5 x 60.0 x (0.01)^2 = 0.30%. Total = -6.20%. Option -6.50% ignores convexity; -5.90% subtracts the convexity term.

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