A bond's price changes 2 percent when interest rates drop. The duration model would predict a price increase of more than 2 percent.

Question

Quizplus · Accepted Answer

The duration model predicts a bond's price change based on interest rate changes, but it does not account for convexity, which can cause the actual price change to be different. In this case, the duration model would predict a 2 percent increase, not more.

A Bond's Price Changes 2 Percent When Interest Rates Drop