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CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties

A bond is priced at 100.00. If its yield falls by 25 bps the price is 101.90, and if its yield rises by 25 bps the price is 98.14. The approximate convexity of the bond is closest to:

Approximate convexity is about 64. The numerator is 101.90 plus 98.14 minus 200, which equals 0.04. The denominator is 100 times 0.0025 squared, which equals 0.000625. Dividing gives 64. The yield change must be squared and the result scaled by the initial price.

  1. A0.16
  2. B64Correct
  3. C6,400

Explanation

Approximate convexity = (PV- + PV+ - 2PV0) / (PV0 x Δy^2) = (101.90 + 98.14 - 200) / (100 x 0.0025^2) = 0.04 / 0.000625 = 64. Failing to square the yield change gives 0.16, and omitting the division by PV0 gives 6,400.

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