


A bond valued at $200,000 has a duration of 8 and a convexity of 20. Assuming that the bond's spread relative to the benchmark curve increases by 25 basis points due to a credit downgrade, then the approximate change in the bond's market value is closest to:
Comments
The correct answer is A.
Price Change = (Duration * Yield change) + (0.5 * Convexity * Yield change2))
Price change = (8 * 0.0025) + (0.5 * 20 * 0.00252) = 1.99%
The bond's value will fall by approximately 1.990% * 200,000 = $3,988.