Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the percentage price change for the bond if interest rates decline 50 basis points from the original 5 percent?

Question

Quizplus · Accepted Answer

To calculate the percentage price change, we can use the formula:
Percentage price change = -duration * change in yield
where duration is the price sensitivity of the bond to changes in interest rates. For a six-year, 5 percent coupon bond, the duration is approximately 4.94 years.
The change in yield is -50 basis points, or -0.5%, since interest rates declined.
Plugging in the numbers, we get:
Percentage price change = -4.94 * (-0.005) = 0.0247 = 2.47%
Therefore, the bond price would increase by approximately 2.47% if interest rates decline 50 basis points. Answer choice B is the closest to this value.

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