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CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties

A bond has a modified duration of 8.0 and an approximate convexity of 90. The yield falls by 50 bps. The estimated percentage price change using duration and convexity is closest to:

The estimated price change is about +4.11%. Duration contributes +4.00% for a 50 bp fall in yield, and convexity adds 0.11% because the convexity adjustment is positive regardless of the direction of the yield change.

  1. A+3.89%
  2. B+4.11%Correct
  3. C+4.34%

Explanation

Duration term = -8.0(-0.005) = +4.00%. Convexity term = 0.5(90)(0.005)^2 = 0.5(90)(0.000025) = 0.1125%. Total = +4.11%. Subtracting the convexity term gives 3.89%.

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