Level IFixed IncomeYield Curve & Duration
"A bond with a modified duration of 6.5 years and a convexity of 80 experiences a yield increase of 50 basis points. What is the approximate percentage price change?"
A
The price decreases by approximately 3.05%✓
The price decreases by approximately 3.15%C
The price increases by approximately 3.15%Explanation
Price change ≈ −Duration × Δy + ½ × Convexity × (Δy)² = −6.5 × 0.005 + ½ × 80 × (0.005)² = −3.25% + 0.10% = −3.15%