Question

A bond has a MacD of 14.6, ModD of 13.8 and DV01 of $2.5. Suppose its yield to maturity goes down one percentage point (e.g., from 5% to 4%). Which of the following is most likely to be true? [Hint: 1% = 100 basis points]

The bond's price should decrease by approximately $14.6. The bond's price should increase by approximately $13.8. The bond's price should increase by approximately $2.5. The bond's price should increase by approximately 13.8%. E The bond's price should increase by approximately 14.6%.

Answer 1

Change in bond price = -change in interest rates*modified duration

= 1%*13.8

I.e. 13.8%

Hence, bond price should increase by approximately 13.8%

Hence , the answer is D.