CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Consider a five-year, 5% coupon, semi-annual payment bond and a 10-year, 5% coupon, semi-annual payment bond. The price and required return of both are $1,000 and 5%, respectively. If the level of market rates increases such that both bonds have required returns of 6% ______
A. the price of the five-year bond will decrease by 4.49%.
B. the price of the 10-year bond will decrease by 7.36%.
C. the price of the five-year bond will decrease by 4.26%.
Explanation: The new price of the five-year bond is $957.35, and the new price of the 10-year bond is $925.61.

User Contributed Comments 9

User Comment
humphrey is it calculated using McCauly duration?
kalps That has nothing to do with it all you do is calculate the npv of the cash flows under the new interest rate - required returun that is where they get the answer from
geet This is wrong. The coupons are semi-annual so for the 5 year there is 10 payments and 20 for the other. The price of the 5 year bond is 925 and the price of the 10 year is 857.
Pooh To calculate the PV for the 5-year: FV=1000, I=3, PMT=25, N=10, PV=957.35
Shelton FV=1000, PMT=25, I=3, N=10 => -PV/1000-1=-4.265%
N=20=> -PV/1000-1=-7.44%
uberstyle just remember coupon payment is $25, not $2.5. doh!
Spawellian thanks uberstyle... i did the same
kellyyang The price 5 yrs: FV=1000, Pmt=25, I=6/2=3; N=5*2=10 -> pv=957.35
957.35/1000-1=-4.265
gill15 I used Duration and got A - 4.49% on the dot.

I guess now I'm just confused when to use the duration method of price change and to just calculate it.

I guess duration way is just an estimate and this is more accurate.
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