Question

Due to convexity, when interest rates change, the bond price will ____________ the bond price predicted by duration.

Answer 1

ANS:- Convexity is a measure of curvature, ot the degree of curve in relationship between bond price & bond yields.

If the bond duration increases as yield increase, the bond is said to have Negative Convexity; On the other hand if the bond duration increases & yield falls , the bond is said to have a positive convexity.

Manner in which convexity affects bond prices.

• As interest rate falls, bond price rises, on the other hand rising market interest rates leads to fall in bond prices.

In above Questions , answer would be

Due to convexity, when interest rates change, the bond price will ____CHANGE________ the bond price predicted by duration.

NOTE : In given question it has not been mentioned that whether Interest rate is rises or declines, the respective change in bond price predicted by duration cannot be ascertained. So, here it is difficult to answer in terms of "Rise" or "Decline"

Here in Question it just written as Change in Interest rate ( positive or negative trend not mentioned).So, Obviously When Interest rate change the bond price will change as predicted by duration.