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

In a regression of daily percentage price changes of a high-yield bond on changes in a Treasury yield, the estimated slope is −3.2 with an R-squared of 0.15. The analyst's most appropriate conclusion is that:

The most appropriate conclusion is that Treasury yield changes explain little of the bond's price variation, so the empirical duration estimate is weak. An R-squared of 0.15 means credit and other factors dominate, even though the negative slope has the expected sign.

  1. Athe estimated empirical duration is a reliable measure because the slope is negative
  2. BTreasury yield changes explain little of the bond's price variation, so the estimate is weakCorrect
  3. Cthe bond's price rises by 3.2% for each 1% increase in the Treasury yield

Explanation

An R-squared of 0.15 means only 15% of price variation is explained by Treasury yield changes, so the duration estimate is weak, likely because credit factors dominate. A negative slope is expected but does not imply reliability. The third option has the wrong direction: price falls as yield rises.

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