FRM Part I · FRM Exam Part I · Properties of Interest Rates
A bond has a modified duration of 6.0. If its yield rises by 50 basis points, what is the approximate percentage change in its price, using duration only?
The price falls by about 3.0%. Percentage price change is approximately minus modified duration times the yield change, so -6.0 × 0.50% = -3.0%. Prices move inversely to yields, so the sign is negative for a yield increase.
- A-3.0%Correct
- B+3.0%
- C-6.0%
- D-0.3%
Explanation
The approximation is %ΔP ≈ -D_mod × Δy = -6.0 × 0.005 = -0.03, or -3.0%. The +3.0% option has the wrong sign, since prices fall when yields rise. The -6.0% option ignores that the yield change is 0.5%, not 1%.
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