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Question 507.1. On a single day the price of a corporate bond with a modified duration of 4.52 years drops from $87.20 to $85.65. If the benchmark yield increases by 10 basis points during the day, which is *nearest* to the approximate change in the bond's credit spread? | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

Using the modified duration approximation:

\%\Delta P \approx -D_{mod} \times \Delta y

So,

\Delta y \approx -\frac{\%\Delta P}{D_{mod}} = -\frac{85.65/87.20 - 1}{4.52} \approx 0.00393257 = 39.33\text{ bps}

If the benchmark yield rose by 10 bps, then the credit spread must have widened by approximately:

39.33 - 10.00 \approx 29.33\text{ bps}

So the nearest answer is A. Increase of 29 bps.

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Financial Risk Manager Part 1

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Question 507.1. On a single day the price of a corporate bond with a modified duration of 4.52 years drops from `$87.20` to `$85.65`. If the benchmark yield increases by 10 basis points during the day, which is nearest to the approximate change in the bond's credit spread?

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Financial Risk Manager Part 1

Get started today

Comments (0)

Get started today

Question 507.1. On a single day the price of a corporate bond with a modified duration of 4.52 years drops from $87.20 to $85.65. If the benchmark yield increases by 10 basis points during the day, which is nearest to the approximate change in the bond's credit spread?

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Question 507.1. On a single day the price of a corporate bond with a modified duration of 4.52 years drops from `$87.20` to `$85.65`. If the benchmark yield increases by 10 basis points during the day, which is nearest to the approximate change in the bond's credit spread?