Economics · Financial Markets

The valuation and risk assessment of fixed income securities require a deep understanding of duration and convexity. Evaluate the following statements about the price sensitivity of bonds: Statement 1: Modified Duration is a measure of the sensitivity of a bond price to changes in interest rates and is calculated as the Macaulay Duration divided by (1 + y/n). Statement 2: A bond with a high Macaulay Duration will experience a smaller percentage price change for a given change in yield compared to a bond with a low Macaulay Duration. Statement 3: Convexity is a measure of the curvature of the relationship between bond prices and bond yields, and it enhances price gains and softens price losses for investors. Statement 4: For two bonds with the same duration, the one with higher convexity will be less sensitive to large changes in interest rates. Statement 5: Effective Duration is the appropriate measure of price sensitivity for bonds with embedded options such as callable or puttable bonds. Statement 6: When the yield on a bond decreases, its duration increases, which is known as the pull-to-parity effect. Statement 7: The PV01 (Price Value of a Basis Point) represents the absolute change in the price of a bond for a one basis point (0.01%) change in the yield to maturity. Which of the following summaries is accurate?