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Nov 20'23
Exercise
A 20-year bond priced to have an annual effective yield of 10% has a Macaulay duration of 11. Immediately after the bond is priced, the market yield rate increases by 0.25%. The bond's approximate percentage price change, using a first-order Macaulay approximation, is X.
Calculate X.
- –2.22%
- –2.47%
- –2.50%
- –2.62%
- –2.75%
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
Nov 20'23
Solution: B
[[math]]P(0.1025)\approx P(0.10){\Biggl({\frac{1.10}{1.1025}}{\Biggr)}}^{11}=0.97534P(0.10).
[[/math]]
Therefore, the approximate percentage price change is 100(0.97534 – 1) = –2.47%.
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.