Answer: convex.

## Explanation The price/yield relationship for option-free bonds is **convex**. This means that: 1. **Convexity** describes how the duration of a bond changes as interest rates change 2. For option-free bonds, as yields increase, bond prices decrease at a decreasing rate 3. As yields decrease, bond prices increase at an increasing rate ### Key points: - **Linear relationship** (Option A) is incorrect because bond prices don't change at a constant rate with yield changes - **Concave relationship** (Option C) is incorrect - this would describe bonds with embedded options (like callable bonds) - **Convex relationship** (Option B) is correct because: - When yields rise, the price decline is less than what would be predicted by duration alone - When yields fall, the price increase is more than what would be predicted by duration alone ### Mathematical representation: The price-yield relationship can be expressed as: $$P = \sum_{t=1}^{n} \frac{C}{(1+y)^t} + \frac{F}{(1+y)^n}$$ Where: - P = bond price - C = coupon payment - F = face value - y = yield to maturity - n = number of periods This relationship produces a convex curve when graphed, with the curve bending toward the origin.

Author: LeetQuiz .