Question

An 8%, 15-year bond has a yield to maturity of 10% and duration of 8.05 years. If the market yield changes by 25 basis points, how much change will there be in the bond's price?

Answer 1

Answer:

-2.01%

Explanation:

Modified duration = 8.05 years

Market yield = 0.25%

Initial yield to maturity = 10%

As per the price change and duration formula,

Change in price/Price of bond = - Modified Duration * Change in yield

Change in price/Price of bond = - 8.05 * 0.0025

Change in price/Price of bond = -0.020125

Change in price/Price of bond = -2.01%

Thus, if the market yield increases by 25 basis points, there will be a - 2.01% change in bond's price due to duration