Exhibit 18.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a 7% coupon rate. Interest is paid annually and the required rate of return is 6 percent for these bonds.
-Refer to Exhibit 18.2. If interest rates increase 50 basis points, what will be the approximate price change for the Talmart bond?
A)-17.0%
B)-1.7%
C)1.7%
D)1.8%
E)17.0%

Question

Quizplus · Accepted Answer

A 50 basis point increase equates to a 0.50 increase in decimal form. To calculate the approximate price change, multiply the bond's duration (4 years) by the bond's modified duration (3.71) and then multiply by the change in interest rates (-0.005). The approximate price change can be calculated as -4*3.71*-0.005 = 0.0742 or approximately 1.7%. Therefore, the best choice is B.

Exhibit 18.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)