The duration of a 10-year,10% per annum coupon bond,when the interest rate is 10%,is 6.76 years.What happens to the price of the bond if interest rates fall to 8% per annum? The price:

Question

Quizplus · Accepted Answer

When interest rates fall, bond prices rise. The percentage change in price is given by the modified duration multiplied by the percentage change in interest rates. In this case, the modified duration is 6.76 years. The percentage change in interest rates is (10% - 8%) = 2%. Therefore, the percentage change in price is 6.76 x 2% = 12.3%. Since interest rates fell, the price of the bond will rise by 12.3%. Therefore, the correct answer is B.

The Duration of a 10-Year,10% Per Annum Coupon Bond,when the Interest