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    Question

    An investor holds a corporate bond with a Modified

    Duration of 6.2 years. If the market interest rates suddenly increase by 50 basis points (0.50%), what is the approximate percentage change in the price of the bond?
    A Increase by 3.1% Correct Answer Incorrect Answer
    B Decrease by 3.1% Correct Answer Incorrect Answer
    C Decrease by 6.2% Correct Answer Incorrect Answer
    D Increase by 12.4% Correct Answer Incorrect Answer
    E Decrease by 0.31% Correct Answer Incorrect Answer

    Solution

    %Price Change = - Modified Duration x Yield  = -6.2 x 0.50% = -3.1% The negative sign indicates that as yields increase, the price decreases.

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