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    Question

    What will be the bond’s duration if the price of the bond fell by 5% as a result of 0.4% rise in the market yield?

    A 5 years Correct Answer Incorrect Answer
    B 8.33 years Correct Answer Incorrect Answer
    C 10 years Correct Answer Incorrect Answer
    D 12.5 years Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Duration is defined as the sensitivity of the bond price to the change in interest rates. Thus Duration can be given as Duration = % change in price/change in yield                                     = 5%/0.4% = 12.5 years

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