Convexity Implies That Duration Predictions

question 60

Multiple Choice

Convexity implies that duration predictions:
I. Underestimate the percentage increase in bond price when the yield falls.
II. Underestimate the percentage decrease in bond price when the yield rises.
III. Overestimate the percentage increase in bond price when the yield falls.
IV. Overestimate the percentage decrease in bond price when the yield rises.

• A) I and III only
• B) II and IV only
• C) I and IV only
• D) II and III only

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Definitions:

Degree of Operating Leverage

The degree of operating leverage is a measure of how revenue growth translates into growth in operating income, indicating the sensitivity of operating income to changes in sales.

Net Operating Income

The profit derived from a company's core business operations, excluding expenses and revenues from non-operating activities.

Sales Volume

Sales volume refers to the quantity of goods or services sold within a specific period, typically used to gauge a company's performance.

Net Operating Income

A measure of a company's profitability, calculated as total revenue minus operating expenses, excluding taxes and interest.