Question

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

Answer 1

% 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