A bond has remaining maturity of 10 years and pays 9% coupons annually. It has a yield to maturity of 7% and a duration of 7.20 years. If the market yield changes by 0.3%, what is the percentage change in the bond price?Question 6Select one:a.2.02%b.2.80%c.1.98%d.2.16%
Question
A bond has remaining maturity of 10 years and pays 9% coupons annually. It has a yield to maturity of 7% and a duration of 7.20 years. If the market yield changes by 0.3%, what is the percentage change in the bond price?Question 6Select one:a.2.02%b.2.80%c.1.98%d.2.16%
Solution
The percentage change in the bond price can be calculated using the formula for bond price volatility, which is:
Percentage change in bond price = - Duration * Change in yield
Given that the duration is 7.20 years and the change in yield is 0.3%, we can substitute these values into the formula:
Percentage change in bond price = - 7.20 * 0.003 = -0.0216 or -2.16%
Therefore, the percentage change in the bond price is -2.16%. This means that the bond price decreases by 2.16% when the yield increases by 0.3%. So, the correct answer is d. 2.16%.
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