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

A bond is priced at 100.00 at the current yield curve. When the curve shifts down 25 bps in parallel, its price is 101.40. When the curve shifts up 25 bps, its price is 98.70. Its effective duration is closest to:

Effective duration is the price at the lower curve minus the price at the higher curve, divided by twice the original price times the curve shift. That is 2.70 divided by 0.50, which equals 5.40. It is the standard formula for bonds whose cash flows may change with rates.

  1. A2.70
  2. B5.40Correct
  3. C5.80

Explanation

EffDur = (PV- − PV+) / (2 × PV0 × Δcurve) = (101.40 − 98.70) / (2 × 100 × 0.0025) = 2.70 / 0.50 = 5.40. The 2.70 figure omits the factor of 2 and curve shift scaling incorrectly, and 5.80 uses the wrong price difference.

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