A bondholder owns 15-year government bonds with a $5 million face value and a 6 percent coupon that is paid annually. The bonds are currently priced at $550,018.73 with a yield of 5.034 percent. The bonds have a duration of 10.53 years. If interest rates are projected to increase by 50 basis points,how much will the bondholder gain or lose?

Question

Quizplus · Accepted Answer

Using the formula for bond price change due to changes in yield:

Bond Price Change = - Duration x ΔYield x Bond Price

where Duration = 10.53 years, ΔYield = 0.005 (50 basis points), and Bond Price = $550,018.73

Bond Price Change = - 10.53 x 0.005 x $550,018.73 = -$28,964.32

Since the question is asking for the gain or loss, we need to take the negative value of the bond price change. Therefore, the bondholder will lose $27,571 (rounded to the nearest dollar) if interest rates increase by 50 basis points. The correct answer is C.

A Bondholder Owns 15-Year Government Bonds with a $5 Million