### CFA Practice Question

There are 266 practice questions for this study session.

### CFA Practice Question

For a bond with a modified duration of 10.0 and reported convexity of 0.2, a 100 bps increase in spread will result in a ______ price change, approximately.

A. -10.0%
B. -10.1%
C. -9.9%

Rescaling the convexity to 20, the return impact would be -(10 x 0.01) + 1/2 x 20 x 0.012 = -9.9%.

User Comment
danishdubai just to revisit the formula:

= [Mod. Duration x chg spread] + [1/2 x Convexity x (chg spread)square]
johntan1979 Why do we have to re-scale the convexity?
SKIA How the eff are we supposed to know to rescale the convexity when it is never talked about in the notes?
davcer in this case you dont have to make any calculation since you have an increase in the spread, you have a negative impact only for duration of -10%, so Convexity only can diminish it
Shaan23 I don't even understand why its in the section
enetis remember convexity is positive. therefore it reduces the loss in an widening and increases the gain in a tightening. Only logical answer here was C
schweitzdm enetis is right, good catch!

I just want to mention that in the Schweser video lecture for this one it's mentioned.

It's my suspicion that the key take-away is that if convexity is less than 1, must times it by 100 and proceed normally.
Fabulous1 Actually you dont have to rescale it for this calculation:
Price change = -10*1 + 1/2 * 0,2 * (1^2) = -9,9%
I dont change the bps to dezimals but to percentage and calculate with the duration and convexity given.