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A nine-year bond has a yield of 10% and a duration of 7.194 years. If the bond's yield increases by 50 basis points, what is the percentage change in the bond's price as predicted by the duration formula?

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Answer:

The percentage change in the bond's price as predicted by the duration formula is -3.27%

Explanation:

Step 1. Given information.

  • The bond has a 10% yield
  • Duration 7.19
  • Yield increases 50 basis points.

Step 2. Formulas needed to solve the exercise.

Percentage change of price = Duration * Yield increases / (1 + original yield).

Step 3. Calculation.

Percentage change = (-7.194*(0.5%/ 1.10))=-3.27%

Step 4. Solution.

The percentage change in the bond's price as predicted by the duration formula is -3.27%

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