# Fixed Income

Positive convexity means that: A) the graph of a callable bond flattens out as the market value approaches the call price. B) as interest rates change, bond prices will increase at an increasing rate and decrease at a decreasing rate. C) the price of a fixed-coupon bond is inversely related to changes in interest rates. D) bond price sensitivity is lowest when market yields are low.

B?

ill go for b as well

It’s B for sure… B) as interest rates change, bond prices will increase at an increasing rate and decrease at a decreasing rate

agree with b too

What’s wrong with C? If things are inversely related, there is 1/x relation, which is basically the same thing as B?

I say B too…

B.

acwu Wrote: ------------------------------------------------------- > What’s wrong with C? > > If things are inversely related, there is 1/x > relation, which is basically the same thing as B? ---------- Nothing wrong with C, but the question relates to positive convexity.

but y = 1/x graph also has positive convexity… (can tell from graph) I saw C first for some reason and thought there was nothing wrong with it (and also gives convexity arguments). I guess should always look at all 4 answers before making a choice…

acwu Wrote: ------------------------------------------------------- > What’s wrong with C? > > If things are inversely related, there is 1/x > relation, which is basically the same thing as B? No, the effective of positive convexity will adjust the expected price of the bond upwards when interest rates are rising. This is not an inverse relationship.

sorry effect of positive convexity…, not effective