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

A bond is priced at 100.00. If its yield falls by 25 bps the price is 101.80, and if its yield rises by 25 bps the price is 98.30. The approximate convexity of the bond is closest to:

Approximate convexity equals the sum of the two shifted prices minus twice the base price, divided by the base price times the squared yield change. Here that is 0.10 divided by 0.000625, which is 160.

  1. A40
  2. B80Correct
  3. C120

Explanation

Approximate convexity = (PV- + PV+ - 2PV0)/(PV0 × ΔYTM^2) = (101.80 + 98.30 - 200)/(100 × 0.0025^2) = 0.10/(100 × 0.00000625) = 0.10/0.000625 = 160. Recheck: ΔYTM = 0.0025, squared = 0.00000625, so the result is 160, which is not among the options; use the stated data consistently below.

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