Question

A nine-year bond has a yield of 10% and a duration of 7.194 years. If the bond's yield increases by 50 basis points, what is the percentage change in the bond's price as predicted by the duration formula?

Answer 1

The percentage change in the bond's price as predicted by the duration formula is -3.27%

Step-by-step explanation:

Step 1. Given information.

• The bond has a 10% yield
• Duration 7.19
• Yield increases 50 basis points.

Step 2. Formulas needed to solve the exercise.

Percentage change of price = Duration * Yield increases / (1 + original yield).

Step 3. Calculation.

Percentage change = (-7.194*(0.5%/ 1.10))=-3.27%

Step 4. Solution.

The percentage change in the bond's price as predicted by the duration formula is -3.27%