#### rahul.goyl

##### Member

I am not sure if am getting this correct,

In the below post, Duration will overstate for Negative Yield shock (- 25 Bps) instead Understate & (Vica-Versa) Understate

for Positive Yield Shock (+25 Bps).

>> http://www.bionicturtle.com/wiki/FRM2009.L1.12/

12c. If the bond has no embedded options, given the yield shock of +25 bps, is the actual bond position likely to be greater than, equal to, or less than the anticipated by the formula that uses duration and convexity?

Greater than; i.e., the loss in value will be less than predicted so the position value will be greater than predicted. Duration (first order linear approximation) will understate the position; convexity improves with a second-order measure but, if the bond is plain-vanilla, there will still be a gap between the estimated position and the actual position.

Regards,

Rahul