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FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

A bond trades at 100 at its current yield. If the yield falls by 1 percentage point, its price is 108.0. If the yield rises by 1 percentage point, its price is 92.8. Using these prices, what is the approximate convexity of the bond?

The convexity is about 80. The sum of the two shifted prices minus twice the base price is 0.8, and dividing by the base price of 100 times the squared yield change of 0.0001 gives 80.

  1. A0.8
  2. B40
  3. C80Correct
  4. D800

Explanation

Convexity ≈ (P- + P+ - 2*P0)/(P0*(Δy)^2) = (108.0 + 92.8 - 200)/(100*0.0001) = 0.8/0.01 = 80. The 0.8 option divides only by the price. The 40 option wrongly halves the result. The 800 option uses a Δy that is too small.

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