An 8.5% bond sells for 90% of par and has a modified duration of 11.0. If market interest rates fall by 30 basis points, the new price of the bond will be about
A) 93%
B) 95%
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 = 0.003 (30 basis points = 0.30%). Thus, the estimated price change is -11.0 * (-0.003) = 0.033 or 3.3%. Since the bond sells for 90% of par before the interest rate change, the new price is approximately 90% + 3.3% = 93.3%, which is closest to 93%.

An 85% Bond Sells for 90% of Par and Has a a Modified