Consider a security with a duration of 2.78 years. The current interest rate level is 10 per cent p.a. How does the price of the security change if interest rates decrease by 100 basis points (round to two decimals)?
A) The price of the security will decrease by 1 per cent.
B) The price of the security will increase by 1 per cent.
C) The price of the security will decrease by 2.50 per cent.
D) The price of the security will increase by 2.50 per cent.

Question

Quizplus · Accepted Answer

The price of the security will increase by approximately 2.78% when interest rates decrease by 100 basis points, as the duration indicates the percentage change in price for a 1% change in interest rates.

Consider a Security with a Duration of 2