If a bond's volatility is 10.00% and the interest rate goes down by 0.75% (points),then the price of the bond:
A)decreases by 10%
B)decreases by 7.5%
C)increases by 7.5%
D)increases by 0.75%

Question

Quizplus · Accepted Answer

Bond prices and interest rates have an inverse relationship. If interest rates decrease, bond prices increase. The bond's volatility indicates the percentage change in price for a 1% change in interest rates. Therefore, a 0.75% decrease in interest rates would lead to a 7.5% increase in the bond's price (10% volatility * 0.75% change in interest rate).

If a Bond's Volatility Is 10