CFA Practice Question

CFA Practice Question

Which is NOT a correct relationship in convexity:
A. there is a direct relationship between yield and convexity.
B. there is an inverse relationship between yield and convexity.
C. there is a direct relationship between maturity and convexity, and an inverse relationship between coupon and convexity.
Explanation: There is an inverse relationship between yield and convexity, with maturity and coupon constant. This means that the price-yield curve is more convex at its lower-yield (upper left) segment.

User Contributed Comments 13

User Comment
shasha more convexity, more price volatility
timspear If there is a "inverse relationship between yeild and convexity" shouldn't the answer be B?
maro The question asks for "Not Correct" answer!
Will1868 I hate these "not correct" answers - I need to more careful in reading
danlan C is also correct?
ontrack arrrgghh!
StanleyMo so, coupon payment higher, the option is less affected by interest rate risk, with less volatile we know it is less convexity,

and shorter maturity, less convexity(volatility).
and lower yield, increase convexity.
jpducros Draw a vertical line :
On the left, only 2 items to remember (so far I only noted 2) : Coupon and YTM
On the Right, all the rest... Maturity, Duration, Convexity, Price of Bond....

Items on the left or on the right move together, and items on the left move in opposite direction as those on the right.

This diagram is patented !
bkballa jpducros you need to get yourself a patent on this diagram if it doesnt already exist. I just tested every single relationship in bonds and eveything holds. I'm so giddy Its hard to type. Wow, the CFA is really getting to me.
Kathkun jpducros, you are a genius
Insipidity VERY NICE, jpducros!
Knapp Except that's wrong, Coupon and YTM don't move together. The YTM stays the same, regardless of the coupon rates.
GBolt93 It works assuming you have basic understanding of fixed income and understand that things like coupon and maturity are constants and not dependent on other variables.
You need to log in first to add your comment.