Explanation:
The asymmetrical price change described in the question is a classic example of convexity effect in bond pricing.
Key Concepts:
Duration: Measures the linear relationship between bond price changes and interest rate changes. With an 8-year duration, we would expect:
Actual Price Changes Given:
Convexity Effect:
Why Other Options Are Incorrect:
Conclusion: The bond exhibits positive convexity, which causes the price to increase more when rates fall (8.2%) than it decreases when rates rise (7.9%) for the same magnitude of rate change. This is the convexity effect.
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The option-free bonds of Argus Corporation have a duration of eight years. When interest rates rise by 100 bps, the bond's price declines by 7.9%. When interest rates fall by 100 bps, however, the price rises by 8.2%. The asymmetrical price change is most likely caused by the:
A
coupon effect.
B
maturity effect.
C
convexity effect.
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