medium · Certified Financial Planner Psychology
A client named Chen is reviewing a bond portfolio and asks why the duration estimate for a 5% price drop was slightly inaccurate when interest rates rose by 1%.
Which principle of bond mathematics explains this discrepancy?
- Bond convexity causes duration to overstate price drops when rates rise.
- The reinvestment rate risk offset the price sensitivity of the bond.
- Bond convexity causes duration to understate price drops when rates rise.
- The bond's Macaulay duration is equal to its maturity, eliminating price volatility.
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