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 |