The duration of a ten-year,10 percent coupon bond when the interest rate is 10 percent is 6.76 years.What happens to the price of the bond if the interest rate falls to 8 percent?

Question

Quizplus · Accepted Answer

The price of a bond is inversely related to its yield. When the interest rate falls from 10% to 8%, the yield on the bond decreases. Using the formula for duration, we can calculate the approximate percentage change in price for a 1% decrease in yield:

% Change in price = -Duration x % Change in yield

% Change in price = -6.76 x (-2%)

% Change in price = 13.52%

Therefore, the price of the bond would rise by approximately 12.3% (rounded to one decimal place) when the interest rate falls from 10% to 8%.

The Duration of a Ten-Year,10 Percent Coupon Bond When the Interest