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FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

A bond has a full price of 98.50 per 100 face value and a modified duration of 6.2. Using only duration, what is the approximate change in price if the yield rises by 25 basis points?

The price falls by about 1.53. Multiply modified duration of 6.2 by the price of 98.50 and by the yield change of 0.0025, then apply a negative sign because yields rose. Using 100 instead of the actual price would give an incorrect -1.55.

  1. A+1.53
  2. B-1.55
  3. C-0.38
  4. D-1.53Correct

Explanation

ΔP ≈ -D_mod × P × Δy = -6.2 × 98.50 × 0.0025 = -1.527, or about -1.53. Option B uses 100 as the price base instead of the actual price of 98.50. Option A has the wrong sign. Option C divides by four, as if the move were quarterly.

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