Chartered Financial Analyst Level 1
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The price of an option-free bond rises by 7% when the yield to maturity declines by 100 basis points. If the bond's price falls by 7%, the yield to maturity most likely rises by:
The price of an option-free bond rises by 7% when the yield to maturity declines by 100 basis points. If the bond's price falls by 7%, the yield to maturity most likely rises by:
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Explanation:
The correct answer is C because, for bonds with the same coupon rate and time-to-maturity, the percentage price change is greater (in absolute value) when the market discount rate decreases compared to when it increases. This phenomenon is due to the convexity effect, which causes asymmetric price changes for equal changes in yield.