A bond has a Macaulay's duration of 26.56 years. If rates rise from 6.25% to 6.50%, the bonds price will:
A) increase by approximately 6.25%.
B) decrease by approximately 6.25%.
C) increase by approximately 6.50%.
D) decrease by approximately 6.50%.
E) Not enough information is given to answer the question.

Question

Quizplus · Accepted Answer

The bond's price will decrease if interest rates rise. Macaulay's duration can be used to estimate the percentage change in a bond's price for a given change in interest rates. The formula for the approximate percentage change in price is: -Duration × Change in interest rate. Here, the duration is 26.56 years, and the interest rate increases by 0.25% (from 6.25% to 6.50%), so the bond's price will decrease by approximately 6.25% (26.56 × 0.25% ≈ 6.64%, but the closest option given is 6.25%).

A Bond Has a Macaulay's Duration of 26