An analyst determines that a 5.50 percent coupon option-free bond, maturing in 7 years, would experience a 3 percent decrease in price if market interest rates rise by 50 basis points. If market interest rates instead fall by 50 basis points, the bond’s price would increase by:
A. exactly 3%.
B. less than 3%.
C. more than 3%.
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The answer is C which in the light of convexity adjustment is the right choice, but is there any reason as to why one cannot assume that the decrease/increase in price was calculated using duration. |