You own a 7.5%, semiannual coupon bond that matures in 10 years. The par value is $1,000 and the current yield to maturity is 6.5%. What will the percentage change in the price of your bond be if the yield to maturity suddenly increases by 50 basis points?

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Quizplus · Accepted Answer

The price of a bond is inversely related to the yield to maturity (YTM). When YTM increases, the bond price decreases. A 50 basis point increase in YTM from 6.5% to 7.0% would decrease the bond price. The exact percentage change can be calculated using bond pricing formulas, which take into account the coupon rate, the new YTM, the time to maturity, and the par value. Given the specific numbers, the closest estimate without performing the detailed calculation is −3.47%, which reflects the sensitivity of bond prices to changes in interest rates, known as duration.

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