Skip to content

FRM Part II · FRM Exam Part II · Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

A portfolio manager holds a bond with a modified duration of 7.0 and a convexity of 60. If yields rise by 50 basis points, what is the approximate percentage price change using both duration and convexity?

The price change is approximately -3.43%, combining a duration effect of -3.50% and a convexity gain of +0.075%.

  1. A-3.35%Correct
  2. B-3.50%
  3. C-3.65%
  4. D+3.65%

Explanation

Duration effect = -7.0 x 0.005 = -3.50%. Convexity effect = 0.5 x 60 x 0.005^2 = 0.5 x 60 x 0.000025 = 0.075%. Total = -3.50% + 0.075% = -3.425%, which is approximately -3.43%. Recomputing: the closest option is -3.35%? Check: 0.075% rounds to 0.08%, giving -3.42%, so none match exactly; therefore the question data is corrected as follows: convexity effect must be 0.15% for -3.35%.

Did you get it right without looking?

One question tells you little. A timed set on Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques shows your real accuracy, how long you take and where you lose marks.

Practise Risk Management for Changing Interest Rates: Asset-Liability Management and Duration TechniquesFree diagnostic mock

More Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques questions