If a Bond's Volatility Is 5% and the Interest Rate

question 2

Multiple Choice

If a bond's volatility is 5% and the interest rate changes by 0.5% (points) then the price of the bond:

• A) changes by 5%
• B) changes by 2.5%
• C) changes by 7.5%
• D) none of the above

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Definitions:

Normal Curve

A bell-shaped curve that represents the distribution of many types of naturally occurring data; synonymous with Gaussian distribution.

Normal Random Variable

A variable that is distributed in a way that fits the normal (Gaussian) distribution, characterized by its mean and standard deviation.

Mean

The average of a set of numerical values, calculated by adding them together and dividing by the number of values.

Standard Deviation

A measure that quantifies the amount of variation or dispersion of a set of data values from the mean.