8006 Exam Dumps | A bond has a Macaulay duration of 6 years. The yield to maturity for this bond is currently 5%. If interest

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
Question 51

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Question 51/101

A bond has a Macaulay duration of 6 years. The yield to maturity for this bond is currently 5%. If interest rates rise across the curve by 10 basis points, what is the impact on the price of the bond?

A. Increase of 57 basis points

B. Decrease of 57 basis points

C. Increase of 10 basis points

D. Decrease of 10 basis points

Correct Answer: B

Explanation
Since Macaulay duration is 6 years, the modified duration is 6/(1+5%) = 5.71. This means that if interest rates were to rise by 1%, the bond price would decrease by 5.71%. Since interest rates have risen by 10 bps, (100bps = 1%), the bond's price would fall by roughly 0.571%, or 57 basis points

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