Consider a bond selling at par with modified duration of 22-years and convexity of 415.A 2 percent decrease in yield would cause the price to increase by 44%,according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?

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Quizplus · Accepted Answer

The duration-with-convexity rule accounts for both the linear effect of duration and the curvature effect of convexity. The formula is: Percentage change = (-Duration * ΔYield) + (0.5 * Convexity * (ΔYield)^2). Substituting the given values: (-22 * -0.02) + (0.5 * 415 * (0.02)^2) = 44% + 8.3% = 52.3%.

Consider a Bond Selling at Par with Modified Duration of 22-Years