The modified duration of a bond is a measure of the bond's price sensitivity to changes in interest rates. It can be used to estimate the percentage change in the bond's price for a 1% change in interest rates.

To estimate the price change for a smaller change in interest rates, we can multiply the modified duration by the change in interest rates (in decimal form).

Step 1: Convert the change in interest rates to decimal form
An increase of 0.10 percent (10 basis points) is equivalent to 0.0010 in decimal form.

Step 2: Multiply the modified duration by the change in interest rates
The estimated percentage change in the bond's price is 6.8106 * 0.0010 = 0.0068106, or 0.68106%.

Step 3: Calculate the estimated price change
The bond is selling at par, so its price is $1,000. The estimated price change is 0.68106% of $1,000, which is $6.81.

Therefore, if interest rates increase by 0.10 percent, the estimated price change on the bond is a decrease of $6.81. Note that the price change is negative because bond prices decrease when interest rates increase.

Question

The modified duration of a bond is a measure of the bond's price sensitivity to changes in interest rates. It can be used to estimate the percentage change in the bond's price for a 1% change in interest rates.

To estimate the price change for a smaller change in interest rates, we can multiply the modified duration by the change in interest rates (in decimal form).

Step 1: Convert the change in interest rates to decimal form
An increase of 0.10 percent (10 basis points) is equivalent to 0.0010 in decimal form.

Step 2: Multiply the modified duration by the change in interest rates
The estimated percentage change in the bond's price is 6.8106 * 0.0010 = 0.0068106, or 0.68106%.

Step 3: Calculate the estimated price change
The bond is selling at par, so its price is $1,000. The estimated price change is 0.68106% of $1,000, which is $6.81.

Therefore, if interest rates increase by 0.10 percent, the estimated price change on the bond is a decrease of $6.81. Note that the price change is negative because bond prices decrease when interest rates increase.

Knowee AI · Accepted Answer

The modified duration of a bond is a measure of the bond's price sensitivity to changes in interest rates. It can be used to estimate the percentage change in the bond's price for a 1% change in interest rates.

To estimate the price change for a smaller change in interest rates, we can multiply the modified duration by the change in interest rates (in decimal form).

Step 1: Convert the change in interest rates to decimal form
An increase of 0.10 percent (10 basis points) is equivalent to 0.0010 in decimal form.

Step 2: Multiply the modified duration by the change in interest rates
The estimated percentage change in the bond's price is 6.8106 * 0.0010 = 0.0068106, or 0.68106%.

Step 3: Calculate the estimated price change
The bond is selling at par, so its price is $1,000. The estimated price change is 0.68106% of $1,000, which is $6.81.

Therefore, if interest rates increase by 0.10 percent, the estimated price change on the bond is a decrease of $6.81. Note that the price change is negative because bond prices decrease when interest rates increase.

The modified duration of an 11-year, $1,000 Treasury bond paying a 10 percent semi-annual coupon and selling at par has been estimated at 6.8106 years. What will be the estimated price change on the bond if interest rates increase 0.10 percent (10 basis points)

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