The outstanding bonds of Alpha Extracts have a yield to maturity of 5.2% and a modified duration of 8.3. If the yield to maturity instantly decreased to 4.7%, the bond's price would increase/decrease by ________%.

Question

Quizplus · Accepted Answer

To calculate the percentage change in the bond's price, we can use the following formula:

Percentage Change in Price = - Modified Duration x ΔYield

where ΔYield is the change in yield to maturity (in decimal form).

Plugging in the given values, we get:

Percentage Change in Price = -8.3 x (0.052 - 0.047) = 4.15

Since the yield to maturity decreased, the percentage change in price will be positive. Therefore, the bond's price would increase by 4.15%. The answer is D.

The Outstanding Bonds of Alpha Extracts Have a Yield to Maturity