Ann Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X) and a puttable bond (Bond Y). She wants to examine the interest rate sensitivity of these two bonds to a parallel shift in the benchmark yield curve. Assuming an interest rate volatility of 10%, her valuation software shows how the prices of these bonds change for 30-bps shifts up or down.
	Bond X	Bond Y
Time to maturity	3 years from today	3 years from today
Coupon	3.75% annual	3.75% annual
Type of bond	Callable at par one year from today	Putable at par one year from today
Current price (% of par)	100.594	101.33
Price (% of par) when shifting the benchmark yield curve down by 30 bps	101.194	101.882
Price (% of par) when shifting the benchmark yield curve up by 30 bps	99.860	100.924

• The price of Bond X is affected:

	A.	only by a shift in the one-year par rate
	B.	only by a shift in the three-year par rate
	C.	by all par rate shifts but is most sensitive to shifts in the one-year and three-year par rates
	D.	need more information to answer

Ann Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X) and a puttable bond (Bond Y). She wants to examine the interest rate sensitivity of these two bonds to a parallel shift in the benchmark yield curve. Assuming an interest rate volatility of 10%, her valuation software shows how the prices of these bonds change for 30-bps shifts up or down.
	Bond X	Bond Y
Time to maturity	3 years from today	3 years from today
Coupon	3.75% annual	3.75% annual
Type of bond	Callable at par one year from today	Putable at par one year from today
Current price (% of par)	100.594	101.33
Price (% of par) when shifting the benchmark yield curve down by 30 bps	101.194	101.882
Price (% of par) when shifting the benchmark yield curve up by 30 bps	99.860	100.924

• The effective convexity of Bond X:

	A.	cannot be negative
	B.	turns negative when the embedded option is near the money
	C.	turns negative when the embedded option moves out of the money
	D.	need more information to answer

Ann Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X) and a puttable bond (Bond Y). She wants to examine the interest rate sensitivity of these two bonds to a parallel shift in the benchmark yield curve. Assuming an interest rate volatility of 10%, her valuation software shows how the prices of these bonds change for 30-bps shifts up or down.
	Bond X	Bond Y
Time to maturity	3 years from today	3 years from today
Coupon	3.75% annual	3.75% annual
Type of bond	Callable at par one year from today	Putable at par one year from today
Current price (% of par)	100.594	101.33
Price (% of par) when shifting the benchmark yield curve down by 30 bps	101.194	101.882
Price (% of par) when shifting the benchmark yield curve up by 30 bps	99.860	100.924

• Which of the following statements is most accurate?

	A.	Bond Y exhibits negative convexity
	B.	For a given decline in interest rate, Bond X has less upside potential than Bond Y
	C.	The underlying option-free (straight) bond corresponding to Bond Y exhibits negative convexity
	D.	need more information to answer