CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties
A bond has a modified duration of 7.00 and a convexity of 60.0. Yield to maturity increases by 100 bps. Using both duration and convexity, the approximate percentage change in the bond's price is closest to:
The approximate price change is about -6.70%. The duration effect is -7.00% (7.00 x 1%), and the convexity adjustment is +0.30% (0.5 x 60 x 0.0001 x 100), which is added, so the loss is smaller than duration alone suggests.
- A-6.70%Correct
- B-7.00%
- C-7.30%
Explanation
Duration effect = -7.00 x 0.01 = -7.00%. Convexity effect = 0.5 x 60 x (0.01)^2 = 0.30%. Total = -7.00% + 0.30% = -6.70%. Using -7.30% subtracts the convexity term instead of adding it.
Did you get it right without looking?
One question tells you little. A timed set on Yield-Based Bond Duration Measures and Properties shows your real accuracy, how long you take and where you lose marks.
More Yield-Based Bond Duration Measures and Properties questions
- A manager wants to lower the interest rate sensitivity of a bond portfolio ahead of expected rising yields. The action most likely to achiev…
- Two bonds have the same maturity and the same yield-to-maturity. Bond X is a zero-coupon bond and Bond Y pays a 5% annual coupon. Which stat…
- A 6% annual-pay bond is priced at par with a yield of 6%, and has a Macaulay duration of 4.47 years. If the yield rises to 8% with all else …
- An analyst computes portfolio duration as the weighted average of the durations of the individual bonds. The most significant limitation of …
- A bond is priced at 100.00. If yield rises 25 bps the price is 98.00 and if yield falls 25 bps the price is 102.10. The approximate convexit…
- A bond has a Macaulay duration of 7.0 years. An investor with a 10-year horizon is most likely exposed, following an immediate parallel rise…