A 4-year bond with a price of 100.696 exists.The duration on the bond is 3.674.If the yield rises from 5.8% to 6.2%,what is the new bond price as estimated by the duration?
A) $98.40
B) $99.30
C) $100.60
D) $101.40

Question

Quizplus · Accepted Answer

Using the duration formula, we can calculate the approximate percentage change in bond price:
Duration = (1/Price) * (dPrice/dYield)
3.674 = (1/100.696) * (dPrice/0.058)
dPrice = 2.018

To estimate the new bond price, we can use the formula:
New Price = Old Price * (1 - Duration * ΔYield)
New Price = 100.696 * (1 - 3.674 * (0.062 - 0.058))
New Price = $99.30

A 4-Year Bond with a Price of 100