CFA CFA Level 1 FI Question

FI Question

  • This topic has 3 replies, 2 voices, and was last updated Jul-18 by Stuj79.
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    • nfonseca
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      A corporate bond with a 4.25% coupon is priced at $104.03. This bond’s duration and reported convexity are 5.3 and 0.325. If the bond’s credit spread widens by 75 basis points due to a credit rating downgrade, the impact on the bondholder’s return is closest to?

    • Stuj79
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      This is calculated using the Taylor series approximation using duration and convexity.

      % change in Price = – Duration x change in yield + 1/2 x convexity x change in yield squared

      so….

      % change = – 5.3 x 0.0075 + 0.5 x 0.325 x 0.0075^2 = -0.03974 %

      So the price will reduce by 3.974% from 104.03 to 99.90

    • nfonseca
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      I  would agree with that, but the answer is -3.89. Not sure why…

    • Stuj79
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      Does it show any working or explanation to go with the answer?

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