Question

A bond has a modified duration of 9.45 and yield to maturity of 7.8 percent. If interest rates increase by 60 basis points, the bond's price will decrease by _______ percent.

A)

3.89

B)

4.38

C)

5.67

D)

6.33

Answer 1

The Correct Answer is C

Reason :

Bond Market Participants compute the yield implied by the current Market Price. We call Yield to Maturity. It is the IRR of the bond.

There is an inverse relationship between price & yield-

If yield falls , price rises at a higher rate.

If yield rises, price falls at a Slower rate.

So,

Bond has a Modified Duration of 9.45 and yield is expected to go up by 60 basis points i.e. 0.6%.

Because of the inverse relationship of bond price & yield , bond price is expected to fall i.e. decrease by 9.45 * 0.6 = 5.67 %

hence as per the calculation correct answer is option 'C' and all other option is incorrect.