- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 46. Understanding Fixed-Income Risk and Return
- Subject 7. Interest Rate Risk and the Investment Horizon
CFA Practice Question
Here are three bonds with their annualized modified duration, convexity and worst-case scenario ΔYield.
A | 4 | 13 | 20 bps
B | 6 | 50 | 15 bps
C | 10 | 150 | 10bps
Bond | Modified Duration | Convexity | ΔYield
A | 4 | 13 | 20 bps
B | 6 | 50 | 15 bps
C | 10 | 150 | 10bps
Which bond has the highest interest rate risk in terms of price change on a percentage basis?
A. Bond A
B. Bond B
C. Bond C
Explanation: %ΔPrice = (-ModDur x ΔYield) + [1/2 x Convexity x (ΔYield)2]
A: -4 x 0.0020 + ½ x13 x 0.00202 = -0.007974. B: -6 x 0.0015 + ½ x50 x 0.00152 = -0.008944. C. -10 x 0.0010 + ½ x150 x 0.00102 = -0.009925
A: -4 x 0.0020 + ½ x13 x 0.00202 = -0.007974. B: -6 x 0.0015 + ½ x50 x 0.00152 = -0.008944. C. -10 x 0.0010 + ½ x150 x 0.00102 = -0.009925
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