In: Finance
Q. Par-value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true? Please explain
A. If the market yield increases by 1%, the bond's price will decrease by $60.
B. If the market yield increases by 1%, the bond's price will increase by $50.
C. If the market yield increases by 1%, the bond's price will decrease by $50.
D. If the market yield increases by 1%, the bond's price will increase by $60
% change in bond price = -Modified Duration(Change in yield)
Here,
Modified Duration= 6
Change in yield= 0.01
% change in bond price = -6(0.01)
% change in bond price = -0.06
Negative sign means bond price decreases by 6.0%
Par value = $1,000
Change in Price = 0.06(1,000) = $60
So,
Option A is correct
If the market Yield increases by 1%, the Bond's prove will decrease by $60