Question

you own a fixed-income asset with a duration of seven years. if the level of interest rates, which is currently 8.4%, goes down by 10 basis points, how much do you expect the price of the asset to go up/down (in percentage terms)?

Answer 1

So you anticipate a 0.645% gain in asset price.

A bond quote is the most recent price at which a bond was traded, converted to a point scale, and expressed as a percentage of par value.

Bond yield, which represents the return an investor would receive on their investment in a bond, is determined by dividing the face value of the bond by the annual interest rate. Divide all annual interest payments by the bond's face value to arrive at the nominal yield, which is represented as a percentage.

The bond price will change by a percentage of

Delta = D / (1 + y)

= 7 / (1 + 0.084)

= 6.457

Price of the asset = -Delta × Delta Y

= -6.457 × (-0.1%)

= 0.645

Therefore, the price of the asset increased by 0.645%.

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