A bond has a modified duration of 4.6 years. The yield to maturity is 8.9 percent. If interest rates decline by 25 basis points, the bond's price will ________.

Question

Quizplus · Accepted Answer

Using the modified duration formula, we can estimate how much the bond price will change with a 25 basis point decline in interest rates:

ΔP/P = -MD * Δy

Where ΔP/P is the percentage change in price, MD is the modified duration, and Δy is the change in yield in decimal form. Note that we must convert the change in basis points to a decimal by dividing by 100.

ΔP/P = -4.6 * (-0.0025) = 0.0115

Thus, the bond price will increase by approximately 1.15% if interest rates decline by 25 basis points. The correct answer is (C).

A Bond Has a Modified Duration of 4