A bond has a Macaulay's duration of 21 years. If rates rise from 5% to 5.5%, 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

When interest rates rise, bond prices generally fall. The magnitude of the change in price is determined by the duration of the bond. A 1% increase in interest rates would result in approximately a 21% decrease in the bond price (21 years of duration). Therefore, a 0.5% increase in rates would result in approximately a 10.5% decrease in the bond price, which rounds to 10%.

A Bond Has a Macaulay's Duration of 21 Years