A bond that pays interest annually has a 6% promised yield and a price of $1025. Annual interest rates are now projected to fall 50 basis points. The bond's duration is 6 years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

Question

Quizplus · Accepted Answer

The bond's price change can be estimated using the duration formula: Price change ≈ -Duration × Change in yield × Initial price. Here, the change in yield is -0.005 (50 basis points), so the price change is approximately -6 × (-0.005) × $1025 = $30.75. Adding this to the initial price gives $1025 + $30.75 = $1055.75, which rounds to $1054.01.

A Bond That Pays Interest Annually Has a 6% Promised