Consider a bond selling at par with modified duration of 12 years and convexity of 265.A 1 percent decrease in yield would cause the price to increase by 12%,according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?
A) 21.2%
B) 25.4%
C) 17.0%
D) 13.3%
E) None of these is correct.

Question

Quizplus · Accepted Answer

The percentage price change using the duration-with-convexity rule is calculated as: Change = (-Duration * ΔYield) + (0.5 * Convexity * (ΔYield)^2). Substituting the given values: Change = (-12 * -0.01) + (0.5 * 265 * (0.01)^2) = 0.12 + 0.01325 = 0.13325 or 13.3%.

Consider a Bond Selling at Par with Modified Duration of 12