There are certain types of questions in the CFA exam you have to watch out for the units. Here are 2 of them:

1. Calculate the effect annual rate (EAY) using continuous compounding
2. Calculate the bond price by including the convexity

When calculating the continuous compounding, it is easy to memorize the equation:

EAY = e^r - 1

r is the nominal rate (the one usually quoted by the bank). You must convert this into decimals before substituting into the equation.

For example, if r = 4.77%, EAY = exp (0.0477) -1 =1.0489 -1 = 4.89%. Remember to use decimal instead of percentage and subtract 1 from the exponential.

When calculate percentage of bond price change using duration and convexity, also remember to convert the yield change to decimal instead of percentage before squaring! Recalling the equation,

% bond price = – duration x % of yield + convexity x (% of yield) ^2

It doesn’t matter if you use decimal or percentage if only duration is involved. But if you include convexity, please remember to substitute the % change of price and yield in decimal. This is because convexity is given in the form such that you have to use decimal in your calculation.

For example, if the duration is 5.4 and convexity is 50, what is the % change of bond price if the yield increases 5%?

% change of bond price = – 5.4 x 0.05 (decimal) + 50 x (0.05)^2 = -0.145 (in decimal) which means the bond price will decrease by 14.5%