USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds.
-Refer to Exhibit 13.2. If interest rates increase 50 basis points, what will be the approximate price change for the Talmart bond?
A) -17.0 percent
B) -1.7 percent
C) 1.7 percent
D) 1.8 percent
E) 17.0 percent

Question

Quizplus · Accepted Answer

A 50 basis point increase in interest rates would result in a decrease in bond prices. Using the duration formula, we can estimate the price change:
- Duration = (4 x 0.07) / (1 + 0.06) = 3.696
- Estimated price change = - Duration x (change in yield in decimal form)
- Estimated price change = -3.696 x (0.0050) = -0.01848
- Convert to a percentage: -0.01848 x 100 = -1.848%
Therefore, the approximate price change for the Talmart bond would be a decrease of 1.7%, which is the closest choice to -1.848%.