Apparently, i found this Question very Confusing Questions No. 106. [question removed by admin]
it seems easy, but for me i dont get the idea that sometimes we Multiply the Convexity Effect By 1/2 and sometimes we dont! So i calculated it as Follows - Duration Effect (-10.34 × 0.02=-20.68%) -Convexity Effect ( 1/2* 75.80 × (0.02)2 = 1.516% ) hence, -20.68+1.516 = -19.164 and i choose B or it could be ( 75.80 × (0.02)2 = 3.03% ) , hence, -20.68+3.03 = -17.65% and the answer is A
I share your frustration too. The usage of 1/2 seems to appear in Schweser Notes regarding topic on fixed income valuation too…
A funny thing is:
The same question occurs in the CFA Pratice Tests on the CFA homepage with the difference that the convexity is stated as 151.6 and the solution requires to multiply it with 0.5.
There is no more information given.
As a rule of thumb we might multiply with 0.5 if convexity is above 100. I know there’s no logic behind this and it wont be a true rule but we have to hold on something at the exam.
thanks for your replies! Yeah, I kept ot searching all the day long to find any relevant answer but i didn’t. i tried adjusting the convexity by multiplying it by 1/2 sometimes when it’s relatively high, but as you said this doesnt count when you need it. -----------------
me too i find it strange…but i though it was a lack on my understanding!!!
thanks for the heads up on this. So it seems we should not use the 1/2 on the actual exam next week? Or do we try both? Hummmm
But in thr curriculum we find also the formula with 1/2!!!