Question

1. If a bond has high positive convexity:
   1. It must be callable.
   2. It can be callable but must be trading above its call price.
   3. The investor benefits from large changes in interest rates, compared to how an otherwise similar low convexity bond would have performed.
   4. The investor is hurt by large changes in interest rates, compared to how an otherwise low convexity bond would have performed.
   5. Duration provides a precise estimate of the bond’s interest rate risk

Answer 1

High Positive convexity in terms of bonds is the concept that measures the change in price of the bond due to change in yield. Convexity in other words defines the relationship as to how the duration of the bond changes with the change in interest rates. Positive convexity is scenerio in which bond duration increases and the interest rate falls. In other words as rate falls the bond prices rise by a greater rate and it leads to greater increases in bond prices due to which the invetors are benefitted. So, the option (c) summarizes the effect that a bond with high positive convexity would have overall.