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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

A bond has a modified duration of 5.00. If its yield to maturity rises by 40 bps, the approximate percentage change in its price, using duration only, is closest to:

The approximate price change equals negative modified duration times the yield change. Multiplying -5.00 by 0.40% gives -2.00%. Prices fall when yields rise, so a positive result is wrong, and adding the yield change to the duration is not the correct method.

  1. A-2.00%Correct
  2. B+2.00%
  3. C-5.40%

Explanation

%ΔPrice ≈ -ModDur × ΔYield = -5.00 × 0.0040 = -0.0200, or -2.00%. The +2.00% option has the wrong sign because yields and prices move inversely. The -5.40% figure adds the basis points to the duration instead of multiplying.

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