CFA Practice Question
There are 266 practice questions for this study session.
CFA Practice Question
A 6% coupon bond with semi-annual coupons has a convexity (in years) of 120, sells for 80% of par, and is priced at a yield to maturity of 8%. If the ytm increases to 9.5%, the predicted contribution to the percentage change in price, due to convexity, would be ______.
Correct Answer: C
User Contributed Comments 24
|virginia||How do you compute it?|
|Aimy||The answer should be 13.5 percent.|
|kevin||Come on Aimy, the total change is only 1.5%!|
|Gina||convexity adjustment formula:
(estim convexity on seminann.basis)(delta r^2)x100
|mm04||Where is the 60 from? I never see convexity adjusted for semi-annual?|
|stefdunk||convexity is 120, but the bond has a semi-annual coupon, therefore adjust 120/2=60|
|natali||if convexity is adjusted for semi-annual, shouldn't the change in yield also be adjusted - 0.015/2?|
|tengo||If you calculate the convexity for a 20bp shock you get about 84 not 120. I do not know what a convexity of 120 measured in years is sinc econvexity it has totally different units that a duration. the answer appaear to be 2.7%. There are no sample problems were the convexity is ever divided by 2 for a semi annual pay bond!!|
|BADGUY||tengo i had 2.7 too and agree with you!|
|tanyak||so are we dividing annual convexity by 2 or not???|
|thekapila||nopes convexity is not adjusted for semiannual basis.|
|mountaingoat||appears change in yld is not adjusted semi-annual only convexity. when you calculate convexity the change in yield is not divided by 2.|
|MFTIOA||This problem is flawed: if the annual convexity is 120, the semi-annual convexity should be n^2 (n = number of payments), or 2^2=4 times as much, or 480.|
|sam95||No the problem is not flawed.
2x [(120)(0.015/2)^2x100] =1.35
don't forget to change the yld in to semi annual and then after using the formula change it back to the annual to get the % change in price annually.
|panvino||I also agree with Tengo - I calculated the convexity and got 84, though I got 1.89 for convexity adjustment.|
|rocyang||sam95: since convexity adjustment from calculation is given in decimal, the end result 1.35 should stand for 135% change!|
|Jurrens||Rocyang: that's not factoring convexity which causes the curvature in the yield/price relationship. Good question to exemplify this extreme adjustment|
|dipu617||Thanks to sam95.
@Gina : convexity doesn't change to semi-annual, rather change in interest rate is semi-annual....
The solution provided by sam95 is correct. :-)
|johntan1979||No no no no no... it is NEVER stated in the question that the change in YTM is semi-annual... We always assume the basis point change, which, in this case, is 150 basis points or in decimals, 0.015.
2.7% is the right answer, not half of that.
|gill15||Sometimes I read these posts and I think i'm wrong when I'm right. Listen to Johntan...
When you change the basis points you are changing the ANNUAL yield up and down. Do NOT do any other way.
|Callie2||Hmmm..I thought this was a pretty straight forward question.
Convexity Adj = est. convexity * (change in r)^2 * 100
|CJPerugini||Convexity Effect = 0.5*Annual Convexity*(Change in YTM)^2
|CJPerugini||To prove this we can also calculate the effect on price based on a semi-annual basis, where Semi-Annual Convexity = Annual Convexity * 2^2
|sarasyed5||where does the 0.015 come from?|