CFA Practice Question

CFA Practice Question

Bonds of Dover Manufacturing are selling at yield of 5.78%. The bonds carry a coupon of 4.5%, payable annually, and have a maturity of 10 years. If the yields rise by 25 basis points, what is the projected percentage change in the price of the bond?
A. -1.90%
B. -1.94%
C. 1.94%
Explanation: Current bond price, using a financial calculator: FV = 100; N = 10; PMT = 4.50; I/Y = 5.78; CPT PV = 90.48

After an increase of 25 bp, new yield = 5.78 + 0.25 = 6.03. New bond price: FV = 100; N = 10; PMT = 4.50; I/Y = 6.03; CPT PV = 88.76

Percentage change in price = (88.76 / 90.48) - 1 = -1.90%

User Contributed Comments 6

User Comment
jackwez in time crunch always remember your rules... as interest rates go up the bond price will come down...
copus this was a gift. all the question required was plugging numbers into the calculator and getting the percentage change in price. I hate these financial calculators. Would be much easier to do it on a normal calculator.
cindywang9 why is it not adding 0.0025 since it's 25 basis points?
GBolt93 because on a financial calculator you input rates as whole percentages not ratios. So it's 0.0025*100=0.25
MrFortei Thanks for this clarification @GBolt93
will080912 I thought I have to use the modified duration, but
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