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Question:

An analyst calculates that the price of an option‐free bond with a 5% coupon would experience a 13.5% change if yields were to increase by 100 basis points. If yields were to decrease by 100 basis points instead, the bond’s price would most likely:

A
Increase by more than 13.5%.

Explaination

For an option‐free bond, the percentage price decrease from an increase in interest rates is lower than the percentage price increase from a decrease in interest rates. Because the bond would fall by 13.5% if rates increased by 100 bps, it would increase by more than 13.5% if rates fell by 100 bps.

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