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**CFA Practice Question**

A bond is currently trading at 98.5 per 100 par, thus yielding 6.21%. It is estimated that the bond price will be 99.4 if rates decreased by 25 basis points and 97.8 if rates increased by 25 basis points. What is this bond's effective convexity?

A. 43

B. 162

C. 325

**Explanation:**Convexity = (P

_{-}+ P

_{+}- 2 P

_{0}) / ( P

_{0}(Δr)

^{2}) = 325

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**User Contributed Comments**
8

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

ledyba |
Hi! could anyone please explain? thanks |

nowornever |
this is the formula used to calculate the effective convexity of a bond. |

JCopeland |
(99.4+97.8-(2)98.5)/(98.5*(.0025^2))=325 This is the convexity formula. |

schweitzdm |
Good question. Hopefully it doesn't come to that |

daverco |
If I calculate it using the formula as described (and per the text), I get 324.87... Approx. convexity is 162.44 (multiply denominator by two). |

birdperson |
I am with @daverco -- i got 324.87 |

daverco |
Ignore my comment about approx con. The difference is that Effcon uses curve change, and approxcon uses yield change in the denominator. |

mtsimone |
It occured to me that if P0 was lower, that value would be closer to 365. In fact, Excel goal seek shows that value to be 98.48766251 (vs 98.5)... which just shows how rounding can kill you in some calculations. |