A bond has a duration of 7.5 years. Its current market price is $1,125. 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 bond's price change in percentage terms?

Question

Quizplus · Accepted Answer

The bond's price will decrease due to the inverse relationship between bond prices and interest rates. The percentage change in the bond's price can be estimated using the duration and the change in interest rates. The formula for the approximate percentage change in price is: Duration * (Change in interest rate). Here, the change in interest rate is from 7% to 9%, a 2% increase. Therefore, the bond's price will decrease by approximately 7.5 * 2% = 15%. The closest option given is a 14.02% decrease.

A Bond Has a Duration of 7