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CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties

For a option-free bond, the duration-only estimate of the price change from a large yield change is most likely:

Duration alone most likely underestimates the price increase when yields fall. Because the price-yield curve is convex and lies above the duration tangent line, actual prices are higher than the linear estimate for yield moves in either direction.

  1. Aan overestimate of the price decline when yields rise
  2. Ban underestimate of the price increase when yields fallCorrect
  3. Can overestimate of the price increase when yields fall

Explanation

The price-yield curve is convex, lying above its tangent line. So the actual price is higher than the linear estimate for either yield move: actual gains exceed estimated gains and actual losses are smaller than estimated losses. Hence duration alone underestimates the price increase when yields fall.

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