Explanation:
The change in the price of a bond given the change in the yield can be predicted by duration. In the given question, where the price of the bond is 96.86, and the duration of the bond is 1.962, a 50 basis point increase in the yield will decrease the price of the bond by:
Change in price = -Bond price × Duration × Change in yield
Change in price = -96.86 × 1.962 × 0.005 = -0.950
Therefore, the price of the bond after the 50 basis point increase in yield is 96.86 – 0.950 = 95.91.
Q.660 Hina Bibi is a fixed-income analyst at Vio Investment Company. She is responsible for analyzing the risk and return of a company's portfolio of fixed income investments. She is analyzing the change in the price of a hypothetical 7-year bond with the face value of 100 and the price of 96.86. If the duration of the bond that she analyzing is 1.962, then which of the following options presents the accurate change in the price of the bond if the yield on the bond increases by 50 basis points?
A
The price of the bond will increase by $0.95
B
The price of the bond will decrease by $0.95
C
The price of the bond will increase by $0.98
D
The price of the bond will decrease by $0.98
No comments yet.