At the maturity of a bond option, it is estimated that the underlying bond will have a duration of 6 years and a yield of 5%. The forward yield volatility is quoted as 25%. What is the volatility of the forward bond price?
A) 3%
B) 30%
C) 20.8%
D) 7.5%

Question

Quizplus · Accepted Answer

The volatility of the forward bond price can be calculated using the formula: Volatility of bond price = Duration * Yield volatility. Here, it is 6 * 0.25 = 1.5 or 7.5%.

At the Maturity of a Bond Option, It Is Estimated