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Question 161.2. As convexity is the weighted average of maturity-squared, what is this bond’s convexity (i.e., 3-year, $100 par, 4.0% annual coupon with 6.0% continuously compounded yield)? | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

Use the convexity formula based on discounted cash flows:

C = \frac{\sum t^2 \cdot PV(CF_t)}{P}

From the bond pricing in Question 161.1:

$PV(CF_1) \approx 3.767$
$PV(CF_2) \approx 3.547$
$PV(CF_3) \approx 86.868$
$P \approx 94.182$

Then:

C = \frac{1^2(3.767) + 2^2(3.547) + 3^2(86.868)}{94.182} \approx \frac{799.77}{94.182} \approx 8.49

So the correct answer is B.

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Question 161.2. As convexity is the weighted average of maturity-squared, what is this bond’s convexity (i.e., 3-year, `$100` par, 4.0% annual coupon with 6.0% continuously compounded yield)?