CFA Practice Question

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CFA Practice Question

Consider a 10%, 12-year bond selling for 115.25, with a duration of 7.49 and a convexity of 24.75. The duration and convexity adjustments to the price for a +75 basis point shock and a -75 basis point shock, respectively, would be closest to ______.

A. -5.478; 5.757
B. 5.757; -5.757
C. -5.5479; 5.6871
Correct Answer: C

Convexity adjustment for a +75 bp shock = -7.49 x (.0075) x 100 + 0.5 x 24.75x (.0075) x (.0075) x 100 = -5.6175 + .06961 = -5.5479
Convexity adjustment for a -75 bp shock = -7.49 x (-.0075) x 100 + 0.5 x 24.75 x (-.0075) x (-.0075) x 100 = 5.6175 + 0.06961 = 5.6871

User Contributed Comments 8

User Comment
sam95 why are they using duration, if they already have estimated convexity?
sam95 I got it, I was missing a part in the answer.
erinelize Couldn't we just assume for this particular question that a positive shock will cause a negative adjustment to the price and vice versa, therefor leaving A as the only viable answer?
hardig good catch erinelize - just noticed that as well.
johntan1979 That's a wrong assumption, you two. There's negative changes in answers B and C too.
johntan1979 Oh craps, sorry, I just realized the question did state "respectively", so yeah, great catch!
ldfrench These formulas are like a foreign language. Not going to be able to remember them on the exam so no point in learning them.
Kevdharr Remember them as best you can. Review them right before the exam starts. As soon as you can, do a brain dump and jot them down. That's what some of my co-workers have recommended doing. That way, you won't run the risk of forgetting them throughout the course of the exam.
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