Question

Consider a bond selling at par with modified duration of 12 years and convexity of 265. A 1% decrease in yleld would cause the price to Increase by 12%, according to the duration rule. What would be the percentage price change according to the duration- with-convexity rule?

a. 21.2%
b. 13.3%
c. 25.4%
d. 17.0%

Answer 1

b. 13.3%

Step-by-step explanation:

Calculation to determine What would be the percentage price change according to the duration- with-convexity rule

Using this formula formula

∆P/P = -D*∆y + (1/2) * Convexity * (∆y)^2

Let plug in the formula

∆P/P = -12 * -.01 + (1/2) * 265 * (.01)^2

∆P/P = .12 + .01325

∆P/P = .13325*100

∆P/P=13.3%

Therefore What would be the percentage price change according to the duration- with-convexity rule is 13.3%