An 8% bond sells for par and has a modified duration of 11.0. If market interest rates rise by 50 basis points, the new price of the bond will be about
A) 92.5%
B) 94.5%
C) 100.0%
D) 105.0%

Question

Quizplus · Accepted Answer

The bond's price change can be estimated using the modified duration formula: ΔP/P = -D*(Δy), where ΔP/P is the percentage change in price, D is the modified duration, and Δy is the change in yield (in decimal form). Here, Δy = 0.005 (50 basis points = 0.50%). So, the estimated price change is -11.0 * 0.005 = -0.055 or -5.5%. Since the bond sells for par (100%), the new price is approximately 100% - 5.5% = 94.5%.

An 8% Bond Sells for Par and Has a Modified