You own a bond that has a duration of 6 years. Interest rates are currently 7% but you believe the Reserve Bank is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________.

Question

Quizplus · Accepted Answer

With a duration of 6 years, we can apply the approximate price change formula:
Price Change ≈ - Duration × (ΔYield / (1+Yield))
where ΔYield is the change in yield in decimal form (i.e. 0.0025 for 25 basis points) and Yield is the yield in decimal form before the change (i.e. 0.07 for 7%).
Using the given values, we get:
Price Change ≈ -6 × (0.0025 / (1+0.07)) ≈ -1.40%
Therefore, the predicted price change on this bond is -1.40%, which means the answer is B.

You Own a Bond That Has a Duration of 6