A fixed-income analyst is asked to rank three bonds in terms of interest rate risk. Interest rate risk here means the potential price decrease on a percentage basis given a sudden change in financial market conditions. The increases in the yields-to-maturity represent the “worst case” for the scenario being considered.

The modified duration and convexity statistics are annualized. ΔYield is the increase in the annual yield-to-maturity. Rank the bonds in terms of interest rate risk.

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Bond A B C Modified Duration 3.72 5.81 12.39 Convexity 12.1 40.7 158.0 AYield 25 bps 15 bps 10 bps