medium · Certified Financial Planner General Principles
A member of the Quince household owns a long-duration bond. If interest rates rise by 1%, the linear duration estimate predicts a 12% drop in the bond's price.
Because of bond convexity, what is the most likely 'true' price change for the bond?
- A price increase of 1% to offset the rate change.
- A price drop of slightly less than 12%.
- A price drop of exactly 12%.
- A price drop of significantly more than 12%.
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