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CFA Level 1 Question of the Week – Fixed Income

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    • Avatar of Matt_AnalystPrepMatt_AnalystPrep
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        • CFA Charterholder
        25 Jun 2019 at 6:50 pm
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        A bond valued at
        $200,000 has a duration of 8 and a convexity of 20. Assuming that the bond’s
        spread relative to the benchmark curve increases by 25 basis points due to a
        credit downgrade, then the approximate change in the bond’s market value is
        closest to:

        • A. $3,988
        • B. $3,960
        • C. $3,970
      • Avatar of Matt_AnalystPrepMatt_AnalystPrep
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          • CFA Charterholder
          30 Jun 2019 at 8:00 am
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          The correct answer
          is A.

          Price Change = (-Duration * Yield
          change) + (0.5 * Convexity * Yield change2))

          Price change = (-8 *
          0.0025) + (0.5 * 20 * 0.00252) = -1.99% 

          The bond’s value
          will fall by approximately 1.990% * 200,000 = $3,988.

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