A bond has a modified duration of 5. Yields rise by 20 basis points. Approximately how does the price change?
- A. Falls about 1.0%Correct
- B. Rises about 1.0%
- C. Falls about 0.2%
- D. Falls about 5.0%
Takeaway. Modified duration is the exchange rate between yield and price: the percentage price move is duration times the yield move, in the opposite direction.
