Baran

 

3、A 6-year, 5 percent annual coupon bond with $100 par value currently trades at par and has an effective duration of 4.25 years. What is the price change if the yield falls by 50 basis points?

A) 2.13%.

B) 4.25%.

C) -4.25%.

D) 6.38%.

Baran

 

The correct answer is A

 

Percentage price change = (-) (effective duration)( Δy)

= (-)(4.25)(-0.005) = 2.125%

Baran

 

AIM 2: Discuss the differences in applying and interpreting the effective duration, modified duration and Macaulay duration.

 

1、A five-year bond selling at par and yielding 6 percent has a duration of 3.2 years. If interest rates rise one percent, what will be the market price of the bond?

A) 96.8.

B) 97.0.

C) 103.0.

D) 103.2.

Baran

 

The correct answer is A

 

Percent change in price = -(3.2) (0.01) = -3.2%. We are told the bond is currently selling at par, or 100. The new price will be 96.8.

Baran

 

The correct answer is A

 

The volatility of interest rates will affect the frequency with which price changes are observed, but not the magnitude. All else equal, bond price sensitivity is higher for (a) lower coupon bonds; (b) longer term maturity bonds; and (c) lower the initial yield.