Question

Par value bond XYZ has a modified duration of 6. If the market yield increases by 1%, the bond's price will decrease by what? (for a $1000 bond).

Answer 1

Approx. % Change in Bond Price = - Modified Duration * Change in Yield to Maturity

Approx. % Change in Bond Price = -6*1%

since it is given as par bond, current bond price = 1000

Therefore, P2 - 1000 = - 0.06*1000

New bond price, P2 = 1000 - 60 = 940

Therefore, for an increase of 1% in the market yield, bond price decrease by $60.

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Hope this answer your query.

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