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Duration: 4Years a little more or a little less

I was out of time whe I got into thatone... I know that I did it wrong if I answered plain 4Years. Do you remember thisone?

Yes! I had finished the test 28 minutes early and the proctor didn't let me leave so I just sat there thinking about the amount of drinking I'd be doing later that night when it came to me; I got the last answer wrong! I went back and changed it to less than 4%...I remember it asked what the price change would be if the yield increased by 200 bps given a duration of 4.

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Less than.

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Hi,

Did that question tell you the convexity or was it just based on yield change....I can't remember?

Thanks.

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Straight up 4

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It would be very close to 4 had it only changed by 100 or less than 100 bps, but when you have anything greater you need to adjust for convexity.

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Duration is an approximation, i.e. it is a straight line when the actual price change is convex. For a large BP change, it is always be less than for a yield increase and more than for a yield decrease.

The answer was less than in this case.

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Yup. I remember that beauty. Straight from Schweser as well.

Less than, FTW.

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Now this has me thinking. Isn't the % change is price formula equal to:

-De*change in r + C*change in r^2

If the rate goes up the price should decrease by -4 * .02 + the effect of convexity. That would be -.08 + what ever effect convexity has which was not indicated.

Was this possibly one of the tricky CFAI questions as the choices were greater than 4%, %4 and less than %4. With that said -8% is still less than %4!

Any thoughts???

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Now this has me thinking. Isn't the % change is price formula equal to:

-De*change in r + C*change in r^2

If the rate goes up the price should decrease by -4 * .02 + the effect of convexity. That would be -.08 + what ever effect convexity has which was not indicated.

Was this possibly one of the tricky CFAI questions as the choices were greater than 4%, 4% and less than 4%. With that said -8% is still less than 4%!

Any thoughts???

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