Assuming market value and PV01 constant,which of the following is true of convexity?

Question

Quizplus · Accepted Answer

Convexity indicates how much a bond's price will increase or decrease as its yield changes. Bonds with higher convexity will experience larger price changes due to a change in yield. Therefore, for a given change in yield, the value of a portfolio with higher convexity will change more than a portfolio with lower convexity. Hence, option A is correct. Option B is incorrect, as investments with positive convexity are generally considered better than those with little or negative convexity, as they have more upside potential during a decline in interest rates while limiting downside risk during an increase in interest rates. Option C is incorrect, as higher convexity leads to a larger price increase for a given decrease in yield and a smaller price decrease for a given increase in yield. Option D is incorrect, as convexity is independent of the scale of investment and is affected by bond maturity.

Assuming Market Value and PV01 Constant,which of the Following Is