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Basic Question 17 of 19
Convexity of bonds increases in importance when interest rates are ______.
B. low
C. expected to change very little
D. less than the coupon rate on the bond
A. high
B. low
C. expected to change very little
D. less than the coupon rate on the bond
User Contributed Comments 15
| User | Comment |
|---|---|
| kalps | Highr r ---? greater changes in price of the pond - ie. greater volatility |
| examinee | I think the answer should be B because at low yields the change in interest rates have a more pronounced effect. |
| phill | It should be A. When interest rate is low the effect of convexity is big. |
| synner | from phill, so convexity of bonds increases in importance when r are low, the effect of convexity is bigger |
| tomchen | How about c ? |
| kulla | I choose B as well, based on the previous questions lower the yield greater is the price sensitivity. Since Convexity is the second derivative of price with respect to interest rate ( yield) I think the answer is B. |
| tengo | "increases in importance " is a different concept that increases in volatility. When interest rates are very high duration becomes a less reliable measure of price changes of a bond - why is this true - because convexity is becoming much more important as a component measure of price change |
| alki | tengo, you the man |
| tanyak | doesn't duration and convexity have to do with how LARGE the change in yield is? not whether the yield is high or low? |
| steved333 | It's like shooting a bullet at a target. If you're off a little, and the target is very close, then it matters very little that your aim was not right. However, the farther the target is from you, the more relevant becomes your lack of accuracy. If distance is i-level, and the lack of accuracy is convexity, there it is. |
| JakeZ | very tricky |
| cfaajay | Convexity refine bond duration estimate ,and bond duration will be less easily calculated when interest increases leading to YTM increase (price decrease),then when rate decrease(price increase)..and as it's less easily calculated it's error prone and hence refinement of calculated duration is more important..I.e convexity is more important.... |
| johntan1979 | Not tricky at all. Just remember the graph. At the areas near low yield, moving the yield lower (i.e. to the left) results in increasingly bigger changes to the price. |
| johntan1979 | And please refer to tengo and cfaajay's explanation on the use of bond convexity vs duration to measure risk. |
| gill15 | What Johntan said or just read the notes. |
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Learning Outcome Statements
identify the relationships among a bond's price, coupon rate, maturity, and yield-to-maturity
CFA® 2024 Level I Curriculum, Volume 4, Module 6.