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

An analyst computes effective duration using a parallel shift of the benchmark curve. Compared with a one-sided approach using only a rate increase, the analyst's two-sided approach is most likely to:

The two-sided approach most likely gives a more accurate estimate of price sensitivity. Averaging the price changes from an up shift and a down shift partly offsets the curvature of the price-yield relationship. It works for bonds with embedded options and does not require option-free cash flows.

  1. Aignore convexity in the price estimate
  2. Bprovide a more accurate estimate of the price sensitivityCorrect
  3. Crequire the bond to have no embedded options

Explanation

Using both an up and a down shift averages the price changes and partly offsets the curvature of the price-yield relationship, giving a better estimate of sensitivity. It does not require an option-free bond and it does not eliminate the effect of convexity.

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