An analyst determines that a 5.50 percent coupon option-free bond, maturing in 7 years, would experience a 3 percent decrease in price if market interest rates rise by 50 basis points. If market interest rates instead fall by 50 basis points, the bond’s price would increase by: A. exactly 3%. B. less than 3%. C. more than 3%. ---------------------------------------------------------------------------------------------------------------------- The answer is C which in the light of convexity adjustment is the right choice, but is there any reason as to why one cannot assume that the decrease/increase in price was calculated using duration.
when the question says ‘the bonds price would increase by:’ we are talking about the market or fair value price. the duration calculation is only an approximation. its a quick way to see and accurately approximate the new price of the bond for a given interest rate change. because the question asked for bond price as opposed to the approximate price the correct answer would be C - the price always increases by more than it decreases for a regular bond