Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% decrease in yield would cause the price to increase by 21.2%, according to the duration rule. What would be the percentage price change according to the rule? duration-with-convexity

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% decrease in yield would cause the price to increase by 21.2%, according to the duration rule. What would be the percentage price change according to the rule? duration-with-convexity

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% decrease in
yield would cause the price to increase by 21.2%, according to the duration rule. What would be the
percentage price change according to the duration-with-convexity rule?
O [A] 21.2%
O [B] 25.4%
O [C] 17.0%
O [D] 10.6%

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