hard · Certified Financial Planner Risk Management
The Inoue household is comparing two bonds. Bond A has a duration of 7 and high convexity. Bond B has a duration of 7 and low convexity. If interest rates fall by 1%
Which bond will experience a greater price increase?
- The zero-coupon bond will rise the most regardless of convexity.
- Bond B, because low convexity bonds are more sensitive to rate drops.
- Both bonds will rise by exactly 7%, as duration is the sole determinant of price change.
- Bond A, because convexity understates price gains when rates fall.
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