CFA Level I: bond duration and convexity
The Balance Point
A three-year bond, yields rise one point. A three-minute film that hangs the bond's cash flows from a beam, finds the one spot where it balances, and turns that balance point into the price lever every fixed-income question is really about.
This browser has 3D graphics turned off, so the set cannot be drawn. The math and the narration still play.
The problem
A 3-year annual-pay bond with a 5% coupon is priced at par to yield 5%. Yields rise to 6%. Using duration, the approximate percentage change in price is closest to: (A) -1.00% (B) -2.72% (C) -2.86% (D) -3.00%
(B) -2.72%: Macaulay duration 2.86 years, modified duration 2.86/1.05 = 2.72, times a 1-point rise; the exact repricing is -2.67% (convexity)
