Consider a bond selling at par with modified duration of 10.6 years and convexity of 210.A 2 percent decrease in yield would cause the price to increase by 21.2%,according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?

Question

Quizplus · Accepted Answer

The duration-with-convexity rule can be used to estimate price changes that take into account both duration and convexity. The formula is:

% price change = -duration x % change in yield + 0.5 x convexity x (% change in yield)^2

Substituting the given values, we get:

% price change = -10.6 x (-2%) + 0.5 x 210 x (-2%)^2
% price change = 21.2% - 0.84%
% price change = 20.36%
Therefore, the percentage price change according to the duration-with-convexity rule is 20.36%, which is closest to choice (B) 25.4%.

Consider a Bond Selling at Par with Modified Duration of 10.6