CFA Level I · CFA Level I Exam · Credit Risk
An analyst expects a bond's credit spread to widen. The bond has a modified duration of 6.0 and a spread duration of 5.0. Assuming a 40 bps spread widening with benchmark yields unchanged, the bond's approximate percentage price change is closest to:
The approximate price change is minus spread duration times the spread change: -5.0 × 0.40% = -2.0%. Spread duration is the right measure because only the credit spread changed. Using modified duration would overstate the fall at -2.4%.
- A-2.4%
- B-2.0%Correct
- C+2.0%
Explanation
Price change ≈ -spread duration × change in spread = -5.0 × 0.40% = -2.0%. Using modified duration gives -2.4%, the wrong measure because only the spread changed. The positive sign ignores the inverse relation between spreads and prices.
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