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FRM Part I · FRM Exam Part I · Interest Rates

A bond has a modified duration of 6.5. If its yield rises by 20 basis points, what is the approximate percentage change in its price using duration alone?

The price falls by about 1.30%. Modified duration multiplied by the yield change gives 6.5 × 0.20% = 1.30%, and the sign is negative because bond prices move inversely to yields. Converting 20 basis points to 0.0020 avoids decimal errors.

  1. A-1.30%Correct
  2. B+1.30%
  3. C-0.13%
  4. D-13.0%

Explanation

The approximation is ΔP/P ≈ -D_mod × Δy = -6.5 × 0.0020 = -0.0130, a fall of 1.30%. A positive sign ignores the inverse price-yield relationship. -0.13% and -13.0% come from misplacing the decimal when converting 20 bp.

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