Convexity of a bond is ___________.

Convexity of a bond is ___________. 

A. the same as horizon analysis

B. the rate of change of the slope of the price-yield curve divided by the bond price

C. a measure of bond duration

D. none of these options








Answer: B

You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 basis points, your predicted new price for the bond (including convexity) is _________.

You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 basis points, your predicted new price for the bond (including convexity) is _________. 

A. $638.85

B. $642.54

C. $666.88

D. $705.03








Answer: C

You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including convexity) is _________.

You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including convexity) is _________. 

A. $1,098.45

B. $1,104.56

C. $1,113.41

D. $1,124.22








Answer: D

Convexity implies that duration predictions:

Convexity implies that duration predictions:

I. Underestimate the percentage increase in bond price when the yield falls.
II. Underestimate the percentage decrease in bond price when the yield rises.
III. Overestimate the percentage increase in bond price when the yield falls.
IV. Overestimate the percentage decrease in bond price when the yield rises.



A. I and III only

B. II and IV only

C. I and IV only

D. II and III only






Answer: C

Advantages of cash flow matching and dedicated strategies include:

Advantages of cash flow matching and dedicated strategies include:

I. Once the cash flows are matched, there is no need for rebalancing.
II. Cash flow matching typically earns a higher rate of return than active bond portfolio management.
III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable.


A. I only

B. II only

C. I and III only

D. I, II, and III




Answer: A

Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:

Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:

I. The portfolio must be rebalanced every time interest rates change.
II. The portfolio must be rebalanced over time even if interest rates don't change.
III. Convexity implies duration-based immunization strategies don't work.


A. I only

B. I and II only

C. II only

D. I, II, and III






Answer: B