With a four-year bond of face value $1000 paying an annual coupon of 6%,if current market yields of 6% change to 7%:
A) its duration will increase.
B) the duration price formula will underestimate the change in price.
C) the duration price formula will overestimate the change in price.
D) its duration will decrease.

Question

Quizplus · Accepted Answer

Duration is a measure of bond's sensitivity to interest rate changes. As the market yields increase from 6% to 7%, the bond's price will decrease. However, the extent of the price change may not be accurately estimated using the duration formula, as it assumes a linear relationship between price and yield. In reality, the relationship may be non-linear, leading to an overestimation of price change. Therefore, choice C is the best answer.

With a Four-Year Bond of Face Value $1000 Paying an Annual