Question

You own a bond with a duration of 12 years. The price of the bond is $1,300, and its yield to maturity is 7%. If the interest rate goes down to 6.5%, you would expect that the price of the bond would ________ to ________ .

		A) decrease, $1,100
		B) decrease, $1,227
		C) increase, $1,094
		D) increase, $1,373

Answer 1

Solution :-

The Correct Answer is (D)

that is Increase , $1373

As we know there is a inverse relation between interest rate and price of Bond

So Decrease in interest rate Leads to increase in price of bond

Now here Duration of Bond = 12 Years

Which means for every 1% Change in Interest leads to 12% change in bond Price

Now interest rate change = 0.50% therefore change in interest rate = 12 * 0.50 = 6%

Therefore Price = 1300 * ( 1 + 0.06 ) = 1375

Approx $1,373

Therefore Correct answer is (D)

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