Which of the following statements is true?
A)Convexity is desirable because the larger the convexity the greater the interest rate protection against interest rate decreases and the greater the potential gains following increasing interest rates.
B)Convexity is desirable because the larger the convexity the greater the interest rate protection against interest rate rises and the greater the potential gains following decreasing interest rates.
C)Convexity is undesirable because the larger the convexity the lower the interest rate protection against interest rate rises and the smaller the potential gains following decreasing interest rates.
D)Convexity is undesirable because the larger the convexity the lower the interest rate protection against interest rate decreases and the smaller the potential gains following increasing interest rates.

Question

Quizplus · Accepted Answer

Convexity is desirable because it provides additional protection against interest rate risk, especially when interest rates decline, and also increases the potential gains from declining interest rates. A larger convexity means that the bond price will rise more in response to a decrease in interest rates, providing greater protection and potential gains. Therefore, option B is the correct statement. Options A, C, and D are incorrect.

Which of the Following Statements Is True