In the above question, what is the approximate pricing error when using Macaulay's duration?
A)$8
B)$10
C)$12
D)$14
E)$16

Question

Quizplus · Accepted Answer

Using Macaulay's duration, we get the approximation of the price change as follows:

- For a 1% decrease in yield: (-0.03) x 1% x $450 = -$13.50
- For a 1% increase in yield: (+0.03) x 1% x $450 = $13.50

The absolute value of the difference between these two price changes is $27. Therefore, the approximate pricing error is $27/2 = $13.50, which is closest to option B.

In the Above Question, What Is the Approximate Pricing Error