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Answer: Increase of 6 bps
The effect of the shock on the 14-year yield can be determined by understanding the linear decrease in the shock from the 10-year yield to the 20-year yield. Since the shock starts at 10 bps for the 10-year yield and decreases linearly to zero by the time it reaches the 20-year yield, it means the shock decreases by 1 basis point (bp) for each year of maturity increase. Given that the shock is 10 bps at the 10-year point and decreases linearly, for the 14-year yield, which is 4 years away from the 10-year point, the shock would have decreased by 4 bps (1 bp per year for 4 years). Therefore, the 14-year yield would experience an increase of 6 bps (10 bps initial shock minus 4 bps decrease). This is why the correct answer is C, an increase of 6 bps.
Author: LeetQuiz Editorial Team
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A financial analyst is utilizing key rate duration analysis to assess the influence of interest rate changes on bond prices. The current observation is that the interest rate for a 10-year bond has increased by 10 basis points. Notably, this increase decreases linearly to zero by the time it reaches the 20-year interest rate. Given this information, what is the effect on the 14-year interest rate?
A
Increase of 0 bps
B
Increase of 4 bps
C
Increase of 6 bps
D
Increase of 10 bps
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