A Bond Has a Modified Duration of 7

question 96

Multiple Choice

A bond has a modified duration of 7.22 and a yield to maturity of 8.1%. If interest rates increase by 75 basis points, the bond's price will decrease by ________%.

• A)−.46
• B)−.54
• C)−4.60
• D)−5.42
• E)−6.18

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Definitions:

Permanent Income Hypothesis

A theory suggesting that people's consumption choices are based on their long-term average income rather than their current income.

Tax Cut

A reduction in the amount of taxes imposed by a government, aiming to stimulate economic growth or achieve other policy objectives.

Disposable Income

After income taxes are taken out, disposable income represents the funds available to a household or individual for saving and spending purposes.

APS

Average Propensity to Save, which is the fraction of total income that is saved by an economy or individual.