A bond is selling in the market for $1,100 and has a duration of 4.5 years.Market interest rates are 5 percent and are expected to increase to 7 percent in the near future.What will this bond's price be after the change in market interest rates?
A)$1,006
B)$1,194
C)$1,122
D)$1,078
E)$1,100

Question

Quizplus · Accepted Answer

The bond's price will decrease when market interest rates increase due to the inverse relationship between bond prices and interest rates. The approximate change in the bond's price can be calculated using the duration rule: ΔP = -D * Δy * P, where ΔP is the change in price, D is the duration (4.5 years), Δy is the change in yield (from 5% to 7%, or 2%), and P is the initial price ($1,100). Thus, the change in price is approximately -4.5 * 0.02 * $1,100 = -$99. The new price is approximately $1,100 - $99 = $1,001, with the closest option being $1,006.

A Bond Is Selling in the Market for $1,100 and Has