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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

Which statement about the price-yield relationship for an option-free fixed-rate bond is most accurate?

The price-yield relationship of an option-free bond is convex. Because of this curvature, a given yield decrease raises the price by more than an equal yield increase lowers it. Linear or concave descriptions are wrong because they ignore the convex shape of the curve.

  1. AThe relationship is convex, so price rises more for a yield decline than it falls for an equal yield increase.Correct
  2. BThe relationship is linear, so equal yield changes cause equal price changes.
  3. CThe relationship is concave, so price falls more for a yield increase than it rises for an equal yield decline.

Explanation

The price-yield curve of an option-free bond is convex (bowed toward the origin). For equal yield changes in opposite directions, the price gain from a yield decline exceeds the price loss from a yield increase. A linear or concave shape would ignore this curvature.

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