Par-value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true?
A) If the market yield increases by 1%, the bond's price will decrease by $60.
B) If the market yield increases by 1%, the bond's price will increase by $50.
C) If the market yield increases by 1%, the bond's price will decrease by $50.
D) If the market yield increases by 1%, the bond's price will increase by $60.

Question

Quizplus · Accepted Answer

Modified duration measures the percentage change in price for a parallel shift in yields. A modified duration of 6 means the bond's price will decrease by approximately 6% for a 1% increase in yield. If the bond is at par value ($1000), a 6% decrease translates to a $60 decrease in price.

Par-Value Bond XYZ Has a Modified Duration of 6