CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Convexity of bonds increases in importance when interest rates are ______.

A. high
B. low
C. expected to change very little
D. less than the coupon rate on the bond
Correct Answer: A

User Contributed Comments 15

User Comment
kalps Highr r ---? greater changes in price of the pond - ie. greater volatility
examinee I think the answer should be B because at low yields the change in interest rates have a more pronounced effect.
phill It should be A. When interest rate is low the effect of convexity is big.
synner from phill, so convexity of bonds increases in importance when r are low, the effect of convexity is bigger
tomchen How about c ?
kulla I choose B as well, based on the previous questions lower the yield greater is the price sensitivity. Since Convexity is the second derivative of price with respect to interest rate ( yield) I think the answer is B.
tengo "increases in importance " is a different concept that increases in volatility. When interest rates are very high duration becomes a less reliable measure of price changes of a bond - why is this true - because convexity is becoming much more important as a component measure of price change
alki tengo, you the man
tanyak doesn't duration and convexity have to do with how LARGE the change in yield is? not whether the yield is high or low?
steved333 It's like shooting a bullet at a target. If you're off a little, and the target is very close, then it matters very little that your aim was not right. However, the farther the target is from you, the more relevant becomes your lack of accuracy. If distance is i-level, and the lack of accuracy is convexity, there it is.
JakeZ very tricky
cfaajay Convexity refine bond duration estimate ,and bond duration will be less easily calculated when interest increases leading to YTM increase (price decrease),then when rate decrease(price increase)..and as it's less easily calculated it's error prone and hence refinement of calculated duration is more important..I.e convexity is more important....
johntan1979 Not tricky at all. Just remember the graph. At the areas near low yield, moving the yield lower (i.e. to the left) results in increasingly bigger changes to the price.
johntan1979 And please refer to tengo and cfaajay's explanation on the use of bond convexity vs duration to measure risk.
gill15 What Johntan said or just read the notes.
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