CFA Practice Question

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CFA Practice Question

______, the more volatile the bond price is with respect to changes in spread.

I. The longer the bond's duration
II. The higher the bond's price
III. The higher the bond's credit rating
Correct Answer: I

For III, the opposite is true.

User Contributed Comments 4

User Comment
CJPerugini Why not II due to convexity? Higher bond prices are more sensitive to changes in yield.
ascruggs92 I got that one wrong as well. I'm not sure, but think the reason is because high bond price doesn't necessarily imply a higher risk (i.e. spread). For I, longer duration implies higher risk, meaning a higher spread and more price volatility from a change in spread. We know III is wrong because higher rating means lower risk and a lower spread. The bond's price alone doesn't give us any information on it's risk unless compared to a benchmark, so having a higher price doesn't immediately correlate to a higher spread and more volatility.
ahmed999 @ascruggs92, Actually I think that 3 is correct, Because higher rating means lower YTM which also means higher duration.

Then i'm not understanding how 3 is incorrect???
tyjz @ahmed999, the higher the credit rating, the less risky the bond price. Less risky means less volatile.
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