Asked by Ashley Hewett on Jun 26, 2024
Verified
As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude.
A) greater than
B) equivalent to
C) smaller than
D) The answer cannot be determined from the information given.
Bond Convexity
A measure of the curvature or the degree of the curve in the relationship between bond prices and bond yields, demonstrating how the duration of a bond changes as the interest rate changes.
Yield To Maturity
The total return anticipated on a bond if the bond is held until its maturity date, expressed as an annual rate.
Price Volatility
The rate at which the price of a security increases or decreases for a given set of returns, often measured by the standard deviation of historical returns.
- Grasp the concept of bond convexity and its impact on price movements.
Verified Answer
CR
Candice RobinsonJun 28, 2024
Final Answer :
A
Explanation :
Bond convexity results in a greater price increase for a bond when yields decrease compared to the price decrease resulting from an equal increase in yields. This is due to the fact that, as yields decrease, the bond's duration increases, resulting in a greater price increase.
Learning Objectives
- Grasp the concept of bond convexity and its impact on price movements.