General Studies · Bond Valuation and Risk Analysis
In financial risk assessment, while duration provides a linear estimate of price sensitivity to interest rate changes, convexity is used to measure the curvature of the price-yield relationship. If two fixed-income securities have the same duration but different levels of positive convexity, the security with the higher convexity will exhibit which of the following characteristics?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Its price sensitivity will remain perfectly constant regardless of the magnitude of interest rate movements.
- 2It will experience a greater price increase when interest rates fall and a smaller price decrease when interest rates rise.✓
- 3It will experience a smaller price increase than the lower-convexity security when interest rates fall.
- 4It will experience a greater price decrease than the lower-convexity security when interest rates rise.
Correct answer
It will experience a greater price increase when interest rates fall and a smaller price decrease when interest rates rise.
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