CFA CFA Level 1 CFA Level 1 Question of the Week – Fixed Income

CFA Level 1 Question of the Week – Fixed Income

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  • Matt_AnalystPrep
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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
    Matt_AnalystPrep
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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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