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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

For an option-free bond, the relationship between its price and its yield-to-maturity is most accurately described as:

The price-yield relationship of an option-free bond is convex. Because of this curvature, a given yield decline raises the price by more than an equal yield rise lowers it. A straight line ignores convexity, and concavity would imply the opposite asymmetry.

  1. Aa straight line with a negative slope.
  2. Ba convex curve, so the price rises more for a yield decline than it falls for an equal yield increase.Correct
  3. Ca concave curve, so the price rises less for a yield decline than it falls for an equal yield increase.

Explanation

The price-yield curve of an option-free bond is convex (curved and bowed toward the origin). The slope flattens as yields fall, so a yield decrease raises price by more than an equal yield increase lowers it. A straight line would ignore convexity, and a concave curve would reverse the asymmetry.

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