A bond with duration of 5.7 years has a yield to maturity of 9.0%.The bond's volatility is:
A)1.9%
B)5.2%
C)5.7%
D)9.0%

Question

Quizplus · Accepted Answer

The volatility of a bond is measured by its modified duration, which is a measure of the bond's sensitivity to changes in interest rates. The formula for modified duration is:

Modified duration = (1 + yield to maturity / number of coupon periods per year) / yield to maturity

Substituting the given values, we get:

Modified duration = (1 + 0.09 / 2) / 0.09 = 5.226

Therefore, the volatility of the bond is approximately equal to its modified duration, which is 5.226, or 5.2% rounded to one decimal place. The correct choice is B.

A Bond with Duration of 5