CFA Level I · CFA Level I Exam · Curve-Based and Empirical Fixed-Income Risk Measures
A bond is priced at 100.00. If the benchmark curve falls by 25 bps the bond's price is 101.40, and if the curve rises by 25 bps the price is 98.70. The bond's effective duration is closest to:
Effective duration is about 5.4. It equals the price at the lower curve minus the price at the higher curve, 2.70, divided by twice the initial price times the 0.25% shift, which is 0.50. Forgetting the factor of 2 would wrongly give 10.8.
- A2.7
- B5.4Correct
- C10.8
Explanation
Effective duration = (V- − V+)/(2 × V0 × Δcurve) = (101.40 − 98.70)/(2 × 100 × 0.0025) = 2.70/0.50 = 5.4. Using 0.25 instead of 0.0025 would be wrong, and omitting the 2 in the denominator gives 10.8.
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