MLARM Practice Questions - PRMIA Market, Liquidity & ALM Risk Certificate Exam

Convexity adjustment to a duration-based price estimate is BEST described as:

A second-order term that adds approximately 0.5 × Convexity × (Δy)² × Price to the linear duration estimate A first-order term identical to duration An adjustment relevant only to options, not bonds A linear adjustment that subtracts duration from price

Correct Answer:

A second-order term that adds approximately 0.5 × Convexity × (Δy)² × Price to the linear duration estimate

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