CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties
A bond is priced at 100.00. If the yield curve shifts down 25 bps, its price is 101.20; if it shifts up 25 bps, its price is 98.85. The bond's effective duration is closest to:
Effective duration is about 4.70. The price difference is 2.35 (101.20 minus 98.85), divided by twice the 0.25% curve shift times the initial price of 100, which is 0.50. The result is 4.70.
- A2.35
- B4.70Correct
- C9.40
Explanation
Effective duration = (P– − P+) / (2 × Δcurve × P0) = (101.20 − 98.85) / (2 × 0.0025 × 100) = 2.35 / 0.5 = 4.70. 2.35 omits the factor of 2 in the denominator logic incorrectly dividing by 1.0; 9.40 doubles the result.
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