You own a bond that has a duration of 6 years.Interest rates are currently 7% but you believe the Fed is about to increase interest rates by 25 basis points.Your predicted price change on this bond is ________.

Question

Quizplus · Accepted Answer

The formula to calculate the price change of a bond due to a change in interest rates is: -1 x Duration x (change in interest rates in decimal form) 
Using this formula, we get: 
-1 x 6 x (0.0025) = -0.015 or -1.5%
Since interest rates are expected to increase, the price of the bond will decrease. Therefore, the answer is B, -1.40%.

You Own a Bond That Has a Duration of 6