Which of the following measures variation of the bond's price yield curve from a straight line?
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A. B. C. D.B
The correct answer is B. Bond convexity.
Bond convexity is a measure of the curvature of the relationship between a bond's price and its yield. It is used to estimate the expected change in a bond's price when there is a change in interest rates. Convexity is important because it can help investors to better understand the risk and return characteristics of a bond investment.
Bond duration is a measure of a bond's sensitivity to changes in interest rates. It measures the average time it takes for the bond to receive its cash flows, including interest payments and principal repayment. Duration assumes that the relationship between a bond's price and yield is linear. However, this assumption is not always true, especially when interest rates are volatile or when the bond has embedded options.
Bond convexity takes into account the fact that the relationship between a bond's price and yield is not always linear. It measures the curvature of the relationship and provides a more accurate estimate of the bond's price sensitivity to interest rate changes. Convexity is an important tool for bond investors because it helps them to better understand the risk and return characteristics of a bond investment, especially when interest rates are volatile.
Bond valuation is the process of determining the fair value of a bond based on its characteristics, such as its coupon rate, maturity date, and credit rating. It does not measure the variation of a bond's price yield curve from a straight line.
Therefore, the correct answer is B. Bond convexity.