If a bond's volatility is 5% and its yield to maturity changes by 0.5% (points)then the price of the bond:
A)changes by 5%
B)changes by 2.5%
C)changes by 7.5%
D)will not change

Question

Quizplus · Accepted Answer

The price of the bond changes by approximately -5*(0.5) = -2.5%. Since the yield to maturity has increased, the bond's price will decrease by approximately its volatility (5%) times the change in yield (0.5%). Therefore, the price will decrease by 2.5%.

If a Bond's Volatility Is 5% and Its Yield to Maturity