If a bond, selling for 98, has a modified duration of 10.0 and interest rates fall by 50 basis points, the new bond price will be about 102.9.

Question

Quizplus · Accepted Answer

The correct answer is true because the bond price will increase when interest rates fall. The modified duration of 10.0 indicates that the bond price will change by 10% for every 1% change in interest rates. Therefore, a 50 basis point (0.5%) decrease in interest rates will result in a 5% increase in the bond price, which is approximately 102.9.

If a Bond, Selling for 98, Has a Modified Duration