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Answer: Statement is correct
**Explanation:** Option A is correct. The formula $\Delta P = -P \times \Delta y \times D$ shows that for a given duration and yield change, the price change is proportional to the current price P. Therefore, all else equal, a bond with a higher current price will experience a larger absolute price change for the same parallel yield curve movement. Key points: - The formula clearly shows price change magnitude depends on P, Δy, and D - For identical duration and yield change, higher P means larger |ΔP| - Upward parallel yield curve movements (positive Δy) result in negative price changes, making bonds cheaper - This relationship holds regardless of convexity considerations for small yield changes Options B, C, and D are incorrect because: - B: Duration doesn't "dominate" - both P and D are multiplicative factors - C: Higher priced bonds don't necessarily have lower duration - D: The relationship holds generally for parallel yield curve movements, not just for bonds with positive convexity
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Assuming parallel movements to the yield curve, the expected price change is:
Where:
All else equal, a negative impact of yield curve move is stronger in absolute terms at the bond which is currently priced higher. Upward parallel curve movements make bonds cheaper.
A
Statement is correct
B
Statement is incorrect because duration effect dominates price effect
C
Statement is incorrect because higher priced bonds have lower duration
D
Statement is correct but only for bonds with positive convexity