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Explanation:
Option-free bonds have positive convexity, and the effect of (positive) convexity is to increase the magnitude of the price increase when yields fall and to decrease the magnitude of the price decrease when yields rise.
(Book 4, Module 58.2, LO 58.f)
Question 57
For an option-free bond, which of the following are the effects of the convexity adjustment on the magnitude (absolute value) of the approximate bond price change in response to an increase in yield and in response to a decrease in yield, respectively?
A
Decrease in yield: Increase in magnitude | Increase in yield: Decrease in magnitude
B
Decrease in yield: Increase in magnitude | Increase in yield: Increase in magnitude
C
Decrease in yield: Decrease in magnitude | Increase in yield: Decrease in magnitude
D
Decrease in yield: Decrease in magnitude | Increase in yield: Increase in magnitude
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