For a given percentage change in Interest rates, the absolute value of the increase in price caused by a decrease in rates is greater than the absolute value of the decrease in price caused by an increase in rates, True False

Answer : TRUE.

Reason :

The absolute value of the increase in the price caused by a decrease in rates is greater than The absolute value of the decrease in the price caused by aincrease in rates.Below is the change showing :

A bond is issued at par (1000) having coupon rate of 10%,market interest rate of 10% and number of years to matuirty i.e 10 years.

Now let us asuume that the rate 9% then value will be :

Value of Bond = (100 * PVAF @ 9% for 10 years) + (1000 * PVF@ 9% for 10th year)

= (100 * 6.41765770099) + (1000 * 0.42241080687)

= 641.765770099 + 422.41080687

= 1064.18

Absolute change = 1064.18 - 1000 = 64.18

Now let us asuume that the rate 11% then value will be :

Value of Bond = (100 * PVAF @ 11% for 10 years) + (1000 * PVF@ 11% for 10th year)

= (100 * 5.88923201096) + (1000 * 0.35218447874)

= 588.923201096 + 352.18447874

= 941.11

Absolute change = 941.11 - 1000 = 58.89