solution
solution.
Since bond prices are convex in yield to maturity,
- For large r decreases, D overpredicts the fall in bond prices and for large r increases, D underpredicts the increase in bond prices
- None of the options are correct
- When bond price decreases, D gives a bigger decreases compared to the decrease obtained from first principles and when bond price increases, D gives a much smaller increase compared to the increase obtained from first principles
- D overpredicts the fall in bond prices for both: large r increases and large r decreases
- D underpredicts the fall in bond prices for both: large r increases and large r decrease
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