- 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

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**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 0.0020

^{2}= -0.007974. B: -6 x 0.0015 + ½ x50 x 0.0015

^{2}= -0.008944. C. -10 x 0.0010 + ½ x150 x 0.0010

^{2}= -0.009925

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