Question

The current YTM of a semi annual bond with a 6.2 year duration is 9.2%. Calculate the percentage rate of change in the price of the bond if the YTM increases by 80 basis points.

Answer 1

First, we need to compute the modified duration -

Modified duration = Duration / (1 + YTM) = 6.2 / (1 + 0.092) = 5.6776557

Modified duration denotes the percentage change in bond price for every 1 percentage change in YTM. So, when YTM changes by 1%, bond price changes by 5.6776557%.

Now, if YTM increases, bond price will decrease since they have an inverse relationship.

Therefore, if YTM increases by 80 basis points or 0.80%, then decrease in bond price = (-)5.6776557% x 0.80 = (-)4.54212% or (-)4.54%