Consider a Bond Selling at Par with Modified Duration of 22

question 78

Multiple Choice

Consider a bond selling at par with modified duration of 22 years and convexity of 415. A 2% 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?

• A) 21.2%
• B) 25.4%
• C) 17.0%
• D) 52.3%

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Definitions:

Wheat Spot Price

The current market price at which wheat can be bought or sold for immediate delivery.

Profit

The financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Contango

A situation in futures trading where the future price of a commodity is higher than the spot price, often indicating expectations of rising prices.

Natural Hedgers

Entities or individuals who inherently have an opposite risk exposure compared to their needed market position, allowing them to hedge their risks without having to use derivative products.