Because of convexity of the price/yield curve of fixed-interest securities,when interest rates _______,duration will _______ the change in price.
A) rise; underestimate
B) rise; overestimate
C) fall; overestimate
D) fall; not affect

Question

Quizplus · Accepted Answer

When interest rates rise, bond prices decrease at a faster rate for longer-duration bonds due to convexity. Therefore, duration will overestimate the change in price for fixed-interest securities.

Because of Convexity of the Price/yield Curve of Fixed-Interest Securities,when