A bond has a duration of 7.5 years. Its current market price is $1125. Interest rates in the market are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of weeks. How will this bank's price change in percentage terms?

Question

Quizplus · Accepted Answer

The bond's price change can be estimated using the duration formula: Percentage change in price ≈ -Duration × Change in interest rate. Here, the change in interest rate is 2% (from 7% to 9%). Thus, the price change ≈ -7.5 × 0.02 = -0.15 or -15%. However, since the duration is an approximation, the closest choice is a fall of 14.02%.

A Bond Has a Duration of 7