Consider a bond with a duration of 7 years having a yield to maturity of 7 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?
A) 3.62 percent
B) 3.45 percent
C) -3.38 percent
D) 3.38 percent
E) -3.62 percent

Question

Quizplus · Accepted Answer

Using the formula for percentage change in bond price given a change in yield:
ΔP/P = -D * ΔY / (1+Y)
where ΔP/P is the percentage change in price, D is duration, ΔY is the change in yield, and Y is the original yield.

Plugging in the values:
ΔP/P = -7 * 0.005 / 1.07
ΔP/P = -0.03224 or -3.224%

However, we need to convert this to a percentage increase/decrease, so the answer is:
ΔP/P = -3.224% / (1-3.224%)
ΔP/P = -3.38% (rounded to two decimal places)

Therefore, the correct answer is C.

Consider a Bond with a Duration of 7 Years Having