Sarah just used $96.33 purchased a Treasury bond. Assume that the yield rate for this bond...

Sarah just used $96.33 purchased a Treasury bond. Assume that the yield rate for this bond is j₂ =3.91% p.a. and the duration of this bond is 2.61 years. Without actually calculating the new price for this bond, use the bond price and the duration value to estimate (use the price sensitivity formula) the change in price of this bond that would result from an increase in yield rate (j₂) of 18 basis points. Round your answer to four decimal places.

Select one:

a. -0.4355

b. -0.4439

c. -0.2178

d. -0.2219

Expert Solution

Change in price of this bond using durating and yield rate

Yield rate and the price of the bond has inverese relaionship. so increase in yield rate will decrease the bond price.

change in price/price=-duration* Change in yield rate/(1+yield rate)

Duration =2.61 years

Yield rate= 3.91% so 1+yield rate =(1+3.91%)=1.0391

Change in yield rate = 18 basis points = 0.0018

Chane in price =-2.61*0.0018/(1.0391)*96.33$

=--0.4355 is the change in bond price

jeff jeffy answered 2 years ago

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