Explanation

This question tests the concept of convexity in bond pricing. For option-free bonds, the price-yield relationship is convex, not linear. This means:

1. Price increases are greater than price decreases for equal changes in yield (in absolute terms)
2. The price-yield curve is curved downward, creating a convex shape

Given the information:

• When yield decreases by 200 bps → Price increases by 5%
• When price decreases by 5% → Yield increases by ???

Because of convexity:

• For a given price decrease (5%), the required yield increase will be greater than the yield decrease that caused an equal price increase
• This is because the price-yield relationship is steeper on the downside (when yields rise) than on the upside (when yields fall)

Mathematical reasoning: The convexity effect means that for equal absolute changes in yield, the price increase (when yields fall) is greater than the price decrease (when yields rise). Conversely, for equal absolute changes in price, the yield increase (when prices fall) must be greater than the yield decrease (when prices rise).

Therefore, if a 200 bps yield decrease causes a 5% price increase, then a 5% price decrease will require more than 200 bps of yield increase.

Answer: C (more than 200 basis points)