Which one of the following par value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points?
A) The bond with a duration of 6 years.
B) The bond with a duration of 5 years.
C) The bond with a duration of 2.7 years.
D) The bond with a duration of 5.15 years.
E) None of these.

Question

Quizplus · Accepted Answer

Price change (in dollars) = -Duration x % change in yield x Price
= -Duration x (50/10000) x (12%/2)
= -Duration x 0.0006 x 60
= -Duration x 0.036

To get a price change of $23, we can solve for Duration as follows:
-Duration x 0.036 = $23
Duration = -$23/(-0.036)
Duration = 638.89

Out of the given choices, only bond D has a duration close to 638.89. Therefore, the correct answer is bond D with a duration of 5.15 years.

Which One of the Following Par Value 12% Coupon Bonds