Question

You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________.

Answer 1

-1.18%

Step-by-step explanation:

The calculation of predicted price change on this bond is given below:-

Percentage change in price = Modified duration × Change in yield

Modified duration = Duration ÷ (1 + yield)

= 6 ÷ 1.07

= 5.6075

Now, we will put the value into formula,

Percentage change in price= - 5.6075 × 0.21%

= -0.0118

= -1.18%