Final answer:
The price impact of a 175 bps increase in spread over the benchmark can be calculated by considering the convexity correction.
Step-by-step explanation:
The price impact of a 175 bps increase in spread over the benchmark can be calculated by considering the convexity correction. Convexity measures the rate of change of a bond's duration as interest rates change. To calculate the price impact, you would first calculate the duration of the bond, and then apply the convexity correction formula.
For example, if the duration of the bond is 5 years and the convexity is 0.02, the price impact would be:
Price Impact = -Duration × Change in Spread + 0.5 × Convexity × (Change in Spread)2
By plugging in the values, you can calculate the price impact. The final result will depend on the specific values of the bond's duration and convexity.