Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually. If the bond is selling at par, what is the percentage price change for the bond if interest rates increase 50 basis points from 6 percent?

Question

Quizplus · Accepted Answer

To calculate the price change for the bond with a 50 basis point increase in interest rates, we can use the modified duration formula:
Modified duration = Macaulay duration / (1 + yield-to-maturity)
Macaulay duration for the bond is 1 year as it has a one-year maturity.
Therefore, modified duration = 1 / (1 + 0.06) = 0.9434
The price change for a 50 basis point increase in interest rates can be calculated using the following formula:
Price change = - (modified duration) x (change in yield) x 100
= -0.9434 x (0.0050) x 100
= -0.4695 percent
Therefore, the percentage price change for the bond if interest rates increase 50 basis points from 6 percent is -0.4695 percent. The correct answer is C.

Consider a One-Year Maturity, $100,000 Face Value Bond That Pays