- CFA Exams
- CFA Level I Exam
- Study Session 15. Fixed Income (2)
- Reading 47. Fundamentals of Credit Analysis
- Subject 5. Credit Risk vs. Return: Yields and Spreads

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**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.

B. -10.1%

C. -9.9%

A. -10.0%

B. -10.1%

C. -9.9%

Correct Answer: C

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

^{2}= -9.9%.###
**User Contributed Comments**
8

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. |