Measuring interest rate risk · Question 12 of 12
A bond has a modified duration of 8. The market yield rises by 0.5 percentage points. How does the price change approximately?
1 answer is correct. Hard
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Answer
- D It falls by about 4%
Explanation
Price change ≈ −duration × yield change = −8 × 0.5% = −4%. Rising yields lower prices. For large changes in interest rates, the estimate becomes less accurate because the relationship is not linear.