Consider a bond with a duration of 7 years having a yield to maturity of 7% and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?
A)3.62%
B)3.45%
C)-3.38%
D)3.38%
E)-3.62%

Question

Quizplus · Accepted Answer

Using the formula for price change due to change in yield, we get:
Price change = -D x (change in yield)
= -7 x 0.005
= -0.035 or -3.38%
Since the interest rates are expected to rise, the change in yield is positive. The negative sign of the price change indicates that the price of the bond will decrease due to the increase in yield.

Consider a Bond with a Duration of 7 Years Having