### CFA Practice Question

Assume the following information about an existing bond issue:

Current price: 96.830
Current yield: 8.375%
Price if yields decline 25 basis points: 98.927
Price if yields increase 25 basis points: 94.796

Using this information, what is the estimated duration of these bonds?
A. 8.53
B. 8.72
C. 8.35
Explanation: Duration is measure of the price sensitivity of a bond to a given change in yield. The duration measure can be approximated using the following equation:
{[price if yields decline - price if yields rise] / [2 * initial price * change in yield in decimal]}

In this example, all of the necessary information has been provided, and imputing it into this equation will yield the following:
{[98.927 - 94.796] / [2 * 96.830 * 0.0025]} = 8.5325

When determining duration, a model must be created to estimate the price changes that will result from a given change in yield. The creation of such a model will be examined at Level II. For now, the price changes resulting from a given change in yield will be provided. What is fundamentally important is to gain an understanding of the duration calculation, and gain a proficiency in applying the duration figure in the evaluation of debt securities. Another very important issue related to duration is the fact that the duration figure is only as good as the valuation model used to determine the prices if the yield should be "shocked" up or down. If the valuation model used to determine the duration figure contains flaws, then the duration figure produced by such a model is a poor measure of the bond's price sensitivity to changes in yield.