$$D = \frac { \left[ \frac { 80 } { ( 1.08 ) ^ { 1 } } \times 1 \right] + \left[ \frac { 80 } { ( 1.08 ) ^ { 2 } } \times 2 \right] \left[ \frac { 80 } { ( 1.08 ) ^ { 3 } } \times 3 \right] \left[ \frac { 80 } { ( 1.08 ) ^ { 4 } } \times 4 \right] \left[ \frac { 80 + 1,000 } { ( 1.08 ) ^ { 5 } } \times 5 \right] } { 1,000 } = 4.312$$
-If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation?
A)-$7.985
B)-$7.941
C)-$3.990
D)+$3.990
E)+$7.949

Question

Quizplus · Accepted Answer

The duration approximation formula is $\Delta P \approx -D \times \Delta y \times P$. Here, $D = 4.312$, $\Delta y = 0.002$, and $P = 1000$. Thus, $\Delta P \approx -4.312 \times 0.002 \times 1000 = -8.624$. The closest option is A) -$7.985.

-If Interest Rates Increase by 20 Basis Points, What Is