CFA Practice Question

CFA Practice Question

Calculate the convexity adjustment to percentage price change for a 9%, 20 year bond priced to yield 6% with a change in yield of 30 basis points. The convexity measure is 82.01.
A. 7.38%
B. 0.0738%
C. 0.82%
Explanation: The convexity adjustment to percentage price change = convexity measure * change in yield squared * 100. Thus in this case the convexity adjustment to percentage price change = 82.01 * (.003*.003) * 100 = .0738%. This is an approximation of the percentage price change that is not explained by duration.

User Contributed Comments 7

User Comment
mpapwa22 Guys..help. 30 basis points, is it not 30 divided by 100?
schelsea 30 basis points = 0.3
Then divide 0.3 by 100 to get it in %
Oarona mpapwa22: Remember this, 100 basis points=1% implying that 30 basis points = 0.3%=0.003.
Procbaby1 1bp = .0001
nfressell2 What happened to (1/2)*C*Y^2?
harrybay Yeah same question as nfressell
ConnerVP1 Agree, shouldn't it be (1/2)? Unless the convexity was a semiannual measure and they multiplied the whole equation by 2 to make it annual?
You need to log in first to add your comment.