Question

A bond presently has a price of $1,030. The present yield on the bond is 8.00%. If the yield changes from 8.00% to 8.10%, the price of the bond will go down to $1,020. The modified duration of this bond is __________.

A) -10.5

B) -8.5

C) 9.7

D) 10.5

Answer 1

Solution:
	Answer is C). 9.7
Working Notes:
	Change in price due to volatility
	dp/p = -MD x dy
	dp=change in price =P1 - P0 = $1,020 - $1,030 = -$10
	p=present bond price = $1030
	dy = change in ytm = 8.10% - 8.00% =0.10%
	MD = Modified duration =??
	dp/p = -MD x dy
	-$10/$1030 = -MD x 0.10%
	MD =( 10/1030)/0.10%
	MD =( 0.00970873786)/0.10%
	MD= 9.7087
	MD =9.7
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