A nine-year bond has a yield to maturity of 10% and a modified duration of 6.54 years. If the market yield changes by 50 basis points, the bond’s expected price change is
A) 3.27%
B) 3.66%
C) 5.00%
D) 6.54%

Question

A nine-year bond has a yield to maturity of 10% and a modified duration of 6.54 years.  If the  market yield changes by 50 basis points, the bond’s expected price change is
A) 3.27%
B) 3.66%
C) 5.00%
D) 6.54%

Quizplus · Accepted Answer

The expected price change of a bond due to a change in yield can be estimated using the formula: Price Change (%) = -Modified Duration * Change in Yield. Here, the modified duration is 6.54 years, and the change in yield is 50 basis points or 0.50%. Therefore, the expected price change is -6.54 * 0.50% = -3.27%. The negative sign indicates that the bond price will decrease if the yield increases.

A Nine-Year Bond Has a Yield to Maturity of 10