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Question:
A bond has an effective duration of 7.5. If the bond yield changes by 100 basis points, the price of the bond will change by:
A
approximately 7.5%.
explanation
The change in price due to a change in yield is only approximate because the calculation of effective duration does not reflect all of the curvature of the price-yield curve (convexity). It is a linear approximation of a non-linear relation.
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