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Exam 2016-FRR Topic 3 Question 367 Discussion

Actual exam question for GARP's 2016-FRR exam
Question #: 367
Topic #: 3
An asset manager just bought a coupon paying bond with principal value $100,000 for $87,000 with a current yield of 4.7%. He assumes that if the yields change to 5.7% the price of the bond would be $84,500. Based on this assumption what is the modified duration of the bond?

Suggested Answer: D Vote an answer

The modified duration of a bond can be estimated using the following formula:
Modified Duration=/Modified Duration=yP/P where P is the change in the bond's price, P is the initial price, and y is the change in yield.
Given:
* Initial price (P) = $87,000
* New price after yield change (P') = $84,500
* Change in price (P) = $87,000 - $84,500 = $2,500
* Change in yield (y) = 5.7% - 4.7% = 1% = 0.01
Modified Duration =
2,500/87,0000.01=0.0287350.01=2.87352.880.012,500/87,000=0.010.028735=2.87352.88

by Gustave at Jun 09, 2025, 05:14 AM

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