CFA Level I · CFA Level I Exam · Yield-Based Bond Convexity and Portfolio Properties
A callable bond has an effective duration of 4.0 and effective convexity of -60. An analyst estimates the percentage price change for a 100 bp decrease in yield using duration and convexity. The estimate is closest to:
The estimated price change is about +3.70%. Duration contributes +4.00% (4.0 x 1%), and negative convexity subtracts 0.30% (0.5 x -60 x 0.0001). Ignoring convexity gives 4.00%, and treating convexity as positive gives 4.30%.
- A+3.70%Correct
- B+4.00%
- C+4.30%
Explanation
Change = -D x dY + 0.5 x C x dY^2 = 4.0 x 0.01 + 0.5 x (-60) x 0.0001 = 0.0400 - 0.0030 = 0.0370, or +3.70%. Using +4.00% ignores convexity, and +4.30% wrongly adds the convexity term as if it were positive.
Did you get it right without looking?
One question tells you little. A timed set on Yield-Based Bond Convexity and Portfolio Properties shows your real accuracy, how long you take and where you lose marks.
More Yield-Based Bond Convexity and Portfolio Properties questions
- As market yields rise sharply far above a putable bond's coupon rate, the price of the putable bond relative to an otherwise identical optio…
- Money duration of a bond position is best described as:
- Which statement best describes the price-yield relationship of an option-free fixed-rate bond?
- Bonds X and Y have the same price, yield-to-maturity and modified duration. Bond X has a convexity of 90 and Bond Y has a convexity of 40. I…
- An analyst values a bond at 100.0 with a yield of 5%. The bond price is 104.2 if the yield falls by 100 bps and 96.4 if the yield rises by 1…
- A bond is priced at 100.00. If its yield falls by 25 bps the price is 101.90, and if its yield rises by 25 bps the price is 98.14. The appro…