A bond has a Macaulay's duration of 10.7 years. If rates fall from 7% to 6%, the bonds price will:
A) increase by approximately 1%.
B) decrease by approximately 1%.
C) increase by approximately 10%.
D) decrease by approximately 10%.
E) Not enough information is given to answer the question.

Question

Quizplus · Accepted Answer

The bond's price will increase by approximately 10% because Macaulay's duration can be used to estimate the percentage change in a bond's price for a 1% change in yield. A duration of 10.7 years means a 1% decrease in yield (from 7% to 6%) would lead to approximately a 10.7% increase in the bond's price.

A Bond Has a Macaulay's Duration of 10