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    Question

    A Debenture of face value of Rs.500 is currently quoting at Rs.530. The duration of the debenture is 3 years. The market interest rates moved from 4.5% to 5.5%. What would be the new price of the debenture?

    A Rs.530.0 Correct Answer Incorrect Answer
    B Rs.514.1 Correct Answer Incorrect Answer
    C Rs.545.9 Correct Answer Incorrect Answer
    D Rs.515.0 Correct Answer Incorrect Answer
    E Rs.485.0 Correct Answer Incorrect Answer

    Solution

    With duration of 3 years, an increase in interest rates by 1%, the price of the bond will fall by 3%. As such the new price of bond   = 530 – (3% of 530)                                                 = 514.1  

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