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

Two bonds have the same modified duration of 7.0, but Bond X trades at a full price of 120 and Bond Y at a full price of 80 per 100 par value. Compared with Bond Y, Bond X most likely has:

Bond X has a higher money duration because money duration is modified duration multiplied by the full price. With equal durations of 7.0, the 120 price gives 840 against 560 for the 80-priced Bond Y, so its currency sensitivity is larger.

  1. Aa lower money duration per 100 par value
  2. Ban equal money duration per 100 par value
  3. Ca higher money duration per 100 par valueCorrect

Explanation

Money duration equals modified duration times full price. Bond X: 7.0 × 120 = 840; Bond Y: 7.0 × 80 = 560. Equal percentage sensitivity does not mean equal currency sensitivity, so Bond X has a higher money duration.

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