Lesson Overview
Make candidates fluent in rate sensitivity, duration approximation, and convexity correction.
Level I questions are three-choice multiple choice and are built to reward fast recognition of the relevant rule, relationship, or calculation path. For this lesson, the job is to turn the topic into a repeatable exam move rather than another note to reread.
Mental Model
A price-yield curve bends away from a straight duration tangent as rate shocks grow.
In the Above MPS system, this sits in Payoffs + Risk: Climb the payoffs. Use that shape as the memory hook, then connect it to the precise facts in the question stem.
Exam Playbook
- Name the topic before calculating. Decide whether the stem is asking for a definition, direction of effect, classification, or numerical result.
- Apply the rule that changes the answer. Ignore details that do not affect the relationship being tested.
- Check the answer against the common trap. If the tempting choice matches one of the traps below, slow down before locking it in.
High-Yield Map
- Price and yield move inversely.
- Duration estimates first-order sensitivity.
- Convexity improves the estimate for larger yield changes.
Common Traps
- Forgetting the negative sign in price-yield relationship.
- Using duration without recognizing convexity impact.
- Confusing modified duration and Macaulay duration.
Repair Drills
- Estimate price impact from a rate change using duration.
- State whether convexity makes the duration-only estimate too high or too low.