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The Moreau investment portfolio holds a long-duration bond. Interest rates rise by 1%. The linear duration estimate predicts a 12% drop in the bond's price.
What does the concept of bond convexity tell us about the actual price change?
- The actual price will drop by more than 12%.
- The actual price will be slightly higher than the linear estimate.
- The actual price change depends entirely on the bond's coupon rate.
- The actual price will drop by exactly 12%.
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