Financial Risk Manager Part 1
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Ultimate access to all questions.
A risk manager is evaluating the price sensitivity of an investment-grade callable bond. The data collected on the bond and its embedded call option are shown in the table below:
| Interest Rate Level | Callable Bond Price | Call Option Price |
|---|---|---|
| 3.95% | 97.9430 | 2.1972 |
| 4.00% | 97.8910 | 2.1090 |
| 4.05% | 97.8566 | 2.0035 |
Assuming that the current interest rate curve is flat at 4%, calculate the approximate effective convexity of the callable bond.