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CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance

A 3-year bond with face value ₹1,000 pays an annual coupon of 10% and is priced at par to yield 10%. Its Macaulay duration is about 2.51 years. Using modified duration, what is the approximate change in the bond's price if the yield rises by 1 percentage point?

The price falls by about 2.28%. Modified duration equals Macaulay duration divided by one plus the yield, 2.51 divided by 1.10, or 2.28. Because price and yield move inversely, a one-point rise in yield cuts the price by roughly 2.28%.

  1. AFall of about 2.28%Correct
  2. BFall of about 2.51%
  3. CRise of about 2.28%
  4. DFall of about 2.73%

Explanation

Modified duration = 2.51 / 1.10 = 2.28. A 1% rise in yield lowers the price by about 2.28 × 1% = 2.28%. Using Macaulay duration directly (2.51%) ignores the division by (1 + y). Using maturity 3 / 1.10 gives 2.73%, which treats the bond as zero-coupon.

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