n NISM Certifications
XXI NISM Series XXI-A
Medium

Which of these is/are correct when a fixed income instrument has positive convexity? (i) Price rise is more than the duration estimate when interest rates decline. (ii) Price rise is less than the duration estimate when interest rates decline. (iii) Price fall is more than the duration estimate when interest rates rise. (iv) Price fall is less than the duration estimate when interest rates rise.

Practice question from NISM XXI A for PMS - Mock Test 2 — bank. The correct answer is highlighted below with a full explanation.

Options

  1. I and IV only

    Correct answer

  2. B

    I and III only

  3. C

    II and III only

  4. D

    II and IV only

Why this is the answer

Positive convexity means bond prices increase more than predicted when rates fall and decrease less than predicted when rates rise.

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