fixed in

dharde9
Good Student
Posts: 12
Joined: Fri Aug 21, 2015 4:46 am

fixed in

Postby dharde9 » Sat Oct 24, 2015 2:04 pm

An option-free bond has duration of 5.25 and convexity of 94.6. The change in the value for a 100 bps shift in the yield curve is closest to
Choose one answer.
a. - 5.2405% Correct
b. -5.273% Incorrect
c. -5.354% Incorrect
The correct answer is A.
Duration effect = -5.25*0.01*100 = -5.25.
Convexity effect = 94.6 * (0.01)2 = 0.0162.
Total effect = -5.2405%.
Incorrect
Marks for this submission: 0/1.


Why convexity is not multiplied by .5 and its should be 94.6*.5*change in yield square

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: fixed in

Postby edupristine » Mon Oct 26, 2015 6:34 am

An option-free bond has duration of 5.25 and convexity of 94.6. The change in the value for a 100 bps shift in the yield curve is closest to:

Solution: Total effect = -duration effect + convexity effect
Duration effect = -5.25 * 0.01= -0.0525 = -5.25%
Convexity effect = 0.5 * 94.6 *(0.01)^2 = 0.00473. = 0.473%
Total effect= (-5.25% + 0.473%) = -4.777%

Answer: -4.777%


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