If yields decrease by 0.75%, the convexity adjustment for a bond with an annual convexity of 400 is:A.0.01125.B.0.02250.C.1.50000.
Question
If yields decrease by 0.75%, the convexity adjustment for a bond with an annual convexity of 400 is:
A. 0.01125
B. 0.02250
C. 1.50000
Solution
The convexity adjustment for a bond can be calculated using the formula:
Convexity Adjustment = 0.5 * Convexity * (Change in Yield)^2
Given in the problem, we have:
Convexity = 400 Change in Yield = -0.75% = -0.0075 (we need to use the decimal form in the formula)
Substituting these values into the formula, we get:
Convexity Adjustment = 0.5 * 400 * (-0.0075)^2
Solving this, we get:
Convexity Adjustment = 0.01125
So, the correct answer is A. 0.01125.
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