Baran

 

The correct answer is B

 

Relative to a bonds with low convexity, the price of a bond with high convexity will increase more when rates decline and decrease less when rates rise.

Baran

 

4、How does the convexity of a bond influence the yield on the bond? All else the same, for a bond with high convexity investors will require:

A) a lower yield. 

B) a higher yield. 

C) the same yield as for a low convexity bond. 

D) a higher or lower yield depending on the bond's duration.

Baran

 

The correct answer is A

 

Convexity is to the advantage of the bond holder because a high-convexity bond's price will decrease less when rates increase and will increase more when rates decrease than a low-convexity bond's price.

Baran

 

The correct answer is D

 

Since the bond is selling at par, it’s yield = coupon rate = 8%.

V0 = Par = 100.

For convexity, change in yield used in calculations is arbitrary – so we use 100 bps in our calculations below.

I/Y = 7.00; FV = 100; N = 12; PMT = 0.08 x 100 = 8; PV = V- = 107.94

I/Y = 9.00; FV = 100; N = 12; PMT = 0.08 x 100 = 8; PV = V+ = 92.84

convexity = (107.94+92.84-200)/(100x0.012)= 78

Baran

 

2、Which of the following statements describe a property of bond convexity? Convexity:

  I.  increases as yields increase.

 II.  increases with the square of maturity.

III.  measures the rate of change in duration.

IV.  increases if the coupon on a bond is increased.

A) II and III only.   

B) I and III only.

C) II and IV only. 

D) III and IV only.

Baran

 

The correct answer is A

 

Convexity is inversely related to yield and is indirectly related to the coupon rate on a bond. Convexity is the second derivative of price with respect to yield, which means that convexity measures the rate of change in duration. Convexity increases with the square of maturity.

Baran

 

3、Why is convexity a good thing for a bond holder? Because when compared to a low convexity bonds a high convexity bond:

A) is usually underpriced. 

B) has better price changes regardless of the direction of the yield change. 

C) is more sensitive to interest rate changes, increasing the potential payoff. 

D) has improved estimation of price changes.

Baran

 

The correct answer is A

 

The point of effective duration is to consider expected changes in cash flow from features such as embedded options.

Baran

 

AIM 5: Define and compute convexity, and interpret the convexity of a fixed income security, given a change in yield and the resulting change in price.

 

1、If a 12-year, 8 percent annual coupon bond with $100 par value is currently selling at par what is the convexity of the bond?

A) 57.0. 

B) 98.0. 

C) 100.5. 

D) 78.0.

Baran

 

13、The goal of computing effective duration is to get a:

A) more accurate measure of the bond's price sensitivity when embedded options exist.

B) preliminary estimate of modified duration.

C) preliminary estimate of Macaulay duration.

D) measure of duration that is effectively constant for the life of the bond.