Which is NOT a property concerning the price volatility of an option-free bond? a) for a given large change in basis points in the required yield, the percentage price increase is smaller than the percentage price decrease b) although the price moves in the opposite direction from the change in the required yield, the percentage price change is not the same for all bonds c) for large changes in required yield, the percentage price change is not the same for an increase in required yield as it is for a decrease in required yield d) for small changes in required yield, the percentage price change for a given bond is roughly the same, whether the required yield increases or decreases.
a?
I think it must be A.
can someone elaborate? correct answer is indeed A.
The greater price increase is due to the convexity of the price-yield relationship. If you picture the curve with the bond priced at the middle and price on the y axis and yield on the x axis, then a move from center to right would mean a small decrease in price for an increase in yield. Because of convexity, however, a move from the center to the left would mean a substantially larger increase in price for a small decrease in yield. Makes sense?
vnysot, yes makes sense now. it’s the convexity factor that comes into play