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Duration and Convexity
Duration and Convexity
A bond is trading at a price of 100 with a yield of 8%. If the yield increases by
1 basis point. the price of the bond will decrease to 99.95. If the yield decreases
by 1 basis point. the price of the bond will increase to 100.04. What is the
modified duration of the bond?
a) 5.0
b) -5.0
c) 4.5
d) -4.5
Example 1-6: FRl\1 Exam 1998--Question 22
What is the price impact of a 10-basis-point increase in yield on a 10-year par
bond with a modified duration of 7 and convexity of 50?
a) -0.705
b) -0.700
c) -0.698
d) -0.690
Example 1-8: FRl\1 Exam 1998--Question 20
Coupon curve duration is a useful method for estimating duration from market
prices of a mortgage-backed security (MBS). Assume the coupon curve of prices for
Ginnie Maes in June 2001 is as follows: 6% at 92. 7% at 94. and 8% at 96.5. What
is the estimated duration of the 7s?
a) 2.45
b) 2.40
c) 2.33
d) 2.25
Example 1-9: FRl\'1 Exam 1998--Question 21
Coupon curve duration is a useful method for estimating convexity from market
prices of an MBS. Assume the coupon curve of prices for Ginnie Maes in June
2001 is as follows: 6% at 92. 7% at 94. and 8% at 96.5. What is the estimated
convexity of the 7s?
a) 53
b)26
c) 13
d) -53
10
6%
3
10
0%
I
4
10
6%
I
5
9
6%
I
How would you rank the bonds from shortest to longest duration?
a) 5-2-1-4-3
b) 1-2-3-4-5
c) 5-4-3-1-2
d) 2-4-5-1-3
6%
6%
6%
5%
6%