For all option-free bonds, the approximate percentage price change that is not explained by duration will have a:
A) Positive value.
B) Negative value.
C) Unchanged value.
D) Changed value.
E) None of the above.

Question

Quizplus · Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates, but it does not capture all factors that can cause price changes. The percentage of price change not explained by duration is captured by convexity, which is always positive for option-free bonds. This means that the actual price change will be greater than what is predicted by duration alone, leading to a positive value for the unexplained portion.

For All Option-Free Bonds, the Approximate Percentage Price Change That