Duration: 4Years a little more or a little less remember, little, wrong

vagabond

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?

JGovender

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.

invic

Less than.

FVPV

Hi,

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

Thanks.

shootingstar

Straight up 4

dmar

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.

Ionutzakis

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.

cchang

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

Less than, FTW.

Kiakaha

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???

Benjiko

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???