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You own a bond that has a duration of 6 years. Interest rates are currently 7% but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is _________.

A.+1.4%
B.-1.4%
C.-2.51%
D.+2.51%

Respuesta :

isaacoranseola

Answer:

-1.4%

Explanation:

D* = 6/1.07 = 5.61

ΔP/P = -D*(Δy) = -5.61(.25%) = -1.4%

jepessoa

Answer:

B) -1.4%

Explanation:

to determine how the price of the bonds changes, we need to calculate the present value of the bond now and after the interest rate is increased:

present value = future value / (1 + r)ⁿ

  • future value = $1,000
  • r = 7%
  • n = 6

present value = $1,000 / (1 + 7%)⁶ = $1,000 / 1.5 = $666.34

if the interest rate increases to 7.25%, then the current value of our bond will be:

present value = $1,000 / (1 + 7.25%)⁶ = $1,000 / 1.522 = $657.08

the change in price = [($657.08 - $666.34) / $666.34] x 100 = -1.39% ≈ -1.4%

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