Skip to content

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

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 100 bps. The approximate convexity of the bond is closest to:

The approximate convexity is about 60. It is computed as (104.2 + 96.4 − 2 × 100.0) divided by (100.0 × 0.01²), which equals 0.6 divided by 0.01. The values 30 and 120 come from mishandling the factor of one-half or two.

  1. A30
  2. B60Correct
  3. C120

Explanation

Approximate convexity = (P- + P+ - 2P0) / (P0 × Δy²) = (104.2 + 96.4 - 200.0) / (100.0 × 0.0001) = 0.6 / 0.01 = 60. Using one-half of this value gives 30, which confuses convexity with the adjustment term; 120 doubles the correct result.

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.

Practise Yield-Based Bond Convexity and Portfolio PropertiesFree diagnostic mock

More Yield-Based Bond Convexity and Portfolio Properties questions