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Basic Question 8 of 12
For a bond with a modified duration of 10.0 and reported convexity of 0.2, a 100 bps increase in spread will result in a ______ price change, approximately.
B. -10.1%
C. -9.9%
A. -10.0%
B. -10.1%
C. -9.9%
User Contributed Comments 8
| User | Comment |
|---|---|
| danishdubai | just to revisit the formula: = [Mod. Duration x chg spread] + [1/2 x Convexity x (chg spread)square] |
| johntan1979 | Why do we have to re-scale the convexity? |
| SKIA | How the eff are we supposed to know to rescale the convexity when it is never talked about in the notes? |
| davcer | in this case you dont have to make any calculation since you have an increase in the spread, you have a negative impact only for duration of -10%, so Convexity only can diminish it |
| Shaan23 | I don't even understand why its in the section |
| enetis | remember convexity is positive. therefore it reduces the loss in an widening and increases the gain in a tightening. Only logical answer here was C |
| schweitzdm | enetis is right, good catch! I just want to mention that in the Schweser video lecture for this one it's mentioned. It's my suspicion that the key take-away is that if convexity is less than 1, must times it by 100 and proceed normally. |
| Fabulous1 | Actually you dont have to rescale it for this calculation: Price change = -10*1 + 1/2 * 0,2 * (1^2) = -9,9% I dont change the bps to dezimals but to percentage and calculate with the duration and convexity given. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
describe macroeconomic, market, and issuer-specific factors that influence the level and volatility of yield spreads
CFA® 2024 Level I Curriculum, Volume 4, Module 14.