The duration and convexity of an option-free bond priced at $90.25 are 10.34 and 75.80, respectively. If yields increase by 200 basis points, the percentage change of the price is closest to:
C is correct; the percentage change in price is calculated as follows: Duration effect: -10.34 × (4-0.02) = -20.68% and convexity effect: 75.80 × (0.02)2 = 3.03%. Total percentage change is the sum of duration effect and convexity effect: -20.68% 4+ 3.03% = -17.65%.