Question

Suppose you own a bond issued by X. that has a Modified duration of 16 years. Interest rates are currently 1.5% but you believe the Fed is about to decrease interest rates by 50 basis points (1 basis point = 0.0001) in order to stimulate the economy further. Your predicted percentage price change on this X bond is ________

A) -8.00% B) -5.62% C) 5.62% D) 8.00%

8．Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy?

A) Switch from low duration to high duration bonds B) Switch from high duration to low duration bonds

Answer 1

1.
Option D
% change in price=-Modified Duration*change in interest rates
=-16*(-0.5%)
=8%

2.
Option B
As rates rise, prices of high duration bonds fall the most
Hence, sell high duration bonds
Switch from high duration to low duration