Question

The measure which is interpreted as the approximate percentage price change of a bond for a...

The measure which is interpreted as the approximate percentage price change of a bond for a modest change in interest rates is called:

A. present value

B. convexity

C. duration

D. yield to maturity

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Answer #1

The correct answer is Convexity

Convexity of the bond measures the approximate percentage price chnage of a bond for a modest change in interest rate while the duration of the bond calculates the senstivity of the bonds.

Yield Represents the total return on a security holder receives on the bond in form of Interest, Dividends while the present value is the current price of the bond that a investor would be willing to pay

To calculate the Convexity we use the formulae,

Convexity = D^2*B*I/B*D*I^2

Where, D is Duration of Bond

B is the Bond Price

I is the Interest Rate

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