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CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties

A bond's price is 98.50. If yield rises 25 bps the price falls to 96.80, and if yield falls 25 bps the price rises to 100.30. The bond is most likely:

The bond is most likely option-free with positive convexity. The price gains 1.80 when yield falls but loses only 1.70 when yield rises, an asymmetry favoring the investor. A callable bond would show smaller gains than losses.

  1. AA putable bond
  2. BAn option-free bond with positive convexityCorrect
  3. CA callable bond with negative convexity

Explanation

Price rise is 1.80 and price fall is 1.70, so the gain from a yield decline exceeds the loss from a yield rise. This asymmetry indicates positive convexity. A callable bond near its call price would show smaller gains than losses. A putable bond would typically show a limited decline when yields rise, so the loss would be smaller than the gain by a larger margin.

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