CFA Practice Question

CFA Practice Question

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

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 * dV2). 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+

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.
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