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Do you agree with the following statement? Explain why. The information about a bond’s duration and...

Do you agree with the following statement? Explain why.

The information about a bond’s duration and convexity adjustment is sufficient to quantify interest rate risk exposure.

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Answer #1

I do not agree with the statement because the information about a bond’s duration and convexity adjustment is not sufficient to quantify interest rate risk exposure. Duration is used as first approximation to estimate bond’s price to interest rate change. When it is combined with convexity, it can more accurately estimate bond’s price with higher interest rate change. But negative convexity of callable bonds makes it difficult to quantify interest rate risk exposure.

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