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CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties

A bond is priced at 100.00. If yield rises 25 bps the price is 98.00 and if yield falls 25 bps the price is 102.10. The approximate convexity is closest to:

Approximate convexity is about 160. Add the two shocked prices (200.10), subtract twice the initial price (200) to get 0.10, then divide by the initial price times the squared yield change (100 x 0.00000625).

  1. A160Correct
  2. B320
  3. C640

Explanation

Convexity = (V- + V+ - 2V0)/(V0 x Δy^2) = (98.00 + 102.10 - 200)/(100 x 0.0025^2)... using Δy=0.0025: 0.10/(100 x 0.00000625)=160. Using the wrong denominator (Δy not squared) or omitting V0 gives larger incorrect values.

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