Question

you own a bond that has a duration of 7 years interest rates are currently 8% but you belive the fed is about to increase rates by 35 basis points your predicted price change on this bond is

Answer 1

Answer: -2.27%

Step-by-step explanation:

Bond prices are inversely related to interest rates so when the interest rises, the price of a bond will fall.

The formula for calculating this fall is;

= - Duration * ( Change in interest rate / (1 + current rate))

= -7 * ( 0.35%/(1 +8%))

= -0.022685

= -2.27%