Skip to content

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

For an option-free fixed-rate bond, the convexity of the price-yield relationship most likely implies that, for a given size of yield change:

The price gain from a yield decline is larger than the price loss from an equal yield rise. Positive convexity makes the price-yield curve bend above its tangent, so the bond benefits asymmetrically. A linear duration estimate would wrongly show equal gains and losses.

  1. Athe price rise from a yield decline exceeds the price fall from a yield increaseCorrect
  2. Bthe price rise and price fall are equal in percentage terms
  3. Cthe price fall from a yield increase exceeds the price rise from a yield decline

Explanation

An option-free bond has a convex, curved price-yield relationship with positive convexity. The curve lies above its tangent line, so a yield decrease raises the price by more than an equal yield increase lowers it. Equal gains and losses would only occur on a straight line, as duration alone assumes.

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