Question

An eight-year bond has a yield of 10% and a duration of 7.208 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

3.28%

Step-by-step explanation:

For the computation of percentage change in the bond's price first, we need to find out the modified duration which is shown below:-

Modified duration = duration ÷ (1+yield)

= 7.208 ÷ (1 + 10%)

= 6.553

Percentage change in price = modified duration × change in yield

= 6.553 × 0.5%

= 3.28%

Therefore for computing the percentage change in the bond's price we simply applied the above formula.