Explanation:
Using the duration-convexity formula for percentage price change:
Price Change = (-Duration × Yield change) + (0.5 × Convexity × Yield change²)
Calculation:
Applying to bond value:
$200,000 = -$3,988The bond's value falls by approximately $3,988 due to the credit downgrade that increased its spread by 25 bps.
Q.3554 A bond valued at $200,000 has a duration of 8 and a convexity of 20. Assuming that the bond's spread relative to the benchmark curve increases by 25 basis points due to a credit downgrade, then what is the approximate change in the bond's market value?
A
$3,988
B
$3,960
C
$3,970
D
$3,368
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