A bond has a modified duration of 7.22 and a yield to maturity of 8.9 percent. If interest rates increase by 75 basis points, the bond's price will decrease by _____ percent.

Question

Quizplus · Accepted Answer

The formula to calculate the approximate percentage change in bond price due to a change in interest rates is:

Percentage Change in Bond Price = - (Modified Duration) x (Change in Yield)

= -7.22 x 0.0075 (since the yield increase is given in basis points)

= -0.05415 or -5.42% (rounded to two decimal places)

Therefore, the correct answer is (D). The bond's price will decrease by 5.42% if interest rates increase by 75 basis points.

A Bond Has a Modified Duration of 7