Explanation:
Change in bond's price = Duration effect + Convexity effect
= [–Duration × Price × Change in yield] + [½ × Convexity × Price × (Change in yield)²]
= (–2 × 10,000 × 0.0015) + (½ × 30 × 10,000 × 0.0015²)
= –30 + 0.335
= –29.665 ≈ –30
This means that, with every increase in interest rates of 15 basis points, the bond's price will decrease by approximately $30. The duration effect causes the price to decrease, and the convexity effect partially offsets this decrease, but the net effect is still a decrease of about $30.
Q-4904 Consider a portfolio that has a bond position worth USD 10,000. Suppose the position has a modified duration of 2 years and a convexity of 30. Assume that the term structure is flat. By how much does the value of the position change if interest rates increase by 15 basis points?
A
The position decreases by $30.
B
The position increases by $60.
C
The position increases by $30.
D
The position does not change.
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