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???

Kiakaha

vthomas Wrote:
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> I chose flat (absolute) 4%. It is just the reason
> being there was not convexity measure given.
>
> And as you know... that duration is a linear
> measure (straight line) and convexity measure
> adjusts for the convexity of the curve. Without
> convexity given, we would not know where the
> increase or decrease would be greater or less
> than 4 %.
>
> Moreover, I came across a similar question in the
> Schweser Q-Bank and the correct answer was an
> absolute number and not the greater or lesser than
> x number.
>
> Hope this helps...

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ditto here