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**CFA Practice Question**

The following table gives the price of a bond with face value $1000 for different interest rates:

5.15% | 1010.8978

5.20% | 1008.7070

5.10% | 1013.0942

Interest Rate | Price

5.15% | 1010.8978

5.20% | 1008.7070

5.10% | 1013.0942

The convexity of the bond is:

A. 22.16

B. 7.45

C. 11.09

**Explanation:**Convexity = (V- + V+ - 2*V0)/(V0 * dV

^{2}). Change the price of the bond by changing yield by a small amount (here 1/20 of 1%) in both directions to get V- and V+

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**User Contributed Comments**
9

User |
Comment |
---|---|

chantal |
Can someone help ? |

chantal |
This bond's price varies perfectly in accordance with its effective duration which would suggest that there sb no convexity adjustment. With an effective duration of 4.34, each 5bp changes produce a change in price of 0.217. |

JCopeland |
The equation (1013.0942 + 1008.707- (2*1010.8978)) Gives us .0056 this is divided by (1010.8978*(.0005^2))=22.16. |

reganbaha |
The equation is right. We are talking about the 2nd derivative here not the first like duration. There is a 2 in the denom. of the duration eqn. but def. not in convex. eqn. |

charlie |
The answer is right. Guys, the question tests convexity, not duration! |

bd1984 |
I thought the LOS for this year's exam said "explain" (or similiar) not "calculate" for Convexity. Can anyone confirm? |

shoara |
I am getting 0.1107926!!! this number is closed but not exactly the answer... anyone |

michaeloa3 |
Note that the text doesn't have the 2 in the denominator for convexity calc. It's the Delta squared x initial present value. In effective duration formula there is a 2 in the denominator : 2 x Delta x initial present value |

Bedee |
Thanks @michaeloa3 for explaining the difference. |