CFA Practice Question
Consider a 10-year, 1% annual coupon, option-free bond. Assume a 4% flat yield curve. If there is an upward change in the 5-year par rate, the value of the bond will:
A. Increase
B. Decrease
C. Remain the same
Explanation: The 5-year key rate duration for a low coupon-rate 10-year bond is negative.
User Contributed Comments 2
| User | Comment |
|---|---|
| rkennan1 | Can someone explain? |
| thanhb91 | Check the book for the key rate duration of Option free bond. You will see that they are negative duration for shorter than maturity par rate. Because it is negative duration, an increase in interest rate will cause an increase in bond price (reverse of positive duration) |