FRM Part I · FRM Exam Part I · Interest Rates
A bond has a modified duration of 6.0. Its yield to maturity rises by 50 basis points. Using only the duration approximation, what is the approximate percentage change in the bond's price?
The price falls by about 3.0%. Percentage price change is approximately minus modified duration times the yield change, so -6.0 x 0.005 = -3.0%. Prices move inversely to yields, so a yield rise produces a loss, not a gain.
- A-3.0%Correct
- B+3.0%
- C-6.0%
- D-0.3%
Explanation
The price change is approximately -D_mod x Δy = -6.0 x 0.005 = -0.03, a fall of 3.0%. The positive 3.0% has the wrong sign, because prices fall when yields rise. The -0.3% result comes from mis-scaling 50bp as 0.0005.
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