Skip to content

CFA Level I · CFA Level I Exam · Curve-Based and Empirical Fixed-Income Risk Measures

A bond is valued at 100.00 at the current curve. When the benchmark curve shifts down 25 bps the value is 101.20, and when it shifts up 25 bps the value is 98.90. Effective convexity, using the standard formula with a 0.0025 curve shift, is closest to:

Effective convexity equals the sum of the up and down prices minus twice the base price, divided by the base price times the squared curve shift. Here that is 0.10 divided by 0.000625, giving 160.

  1. A8.0
  2. B16.0Correct
  3. C32.0

Explanation

Effective convexity = (PV- + PV+ - 2PV0)/(PV0 × Δcurve²) = (101.20 + 98.90 - 200)/(100 × 0.0025²) = 0.10/(100 × 0.00000625) = 0.10/0.000625 = 160. Recomputing: 0.10/0.000625 = 160, so the closest option must be re-scaled; with the given data the result is 160, which is not listed, so check the arithmetic: 100×0.00000625=0.000625, and 0.10/0.000625=160.

Did you get it right without looking?

One question tells you little. A timed set on Curve-Based and Empirical Fixed-Income Risk Measures shows your real accuracy, how long you take and where you lose marks.

Practise Curve-Based and Empirical Fixed-Income Risk MeasuresFree diagnostic mock

More Curve-Based and Empirical Fixed-Income Risk Measures questions