question archive (20%) Consider the following two Treasury securities: Bond Price Modified duration (years) A $95 10 B $80 12 Which bond will have the greater dollar price volatility for a 20-basis-point change in interest rates?
(20%) Consider the following two Treasury securities: Bond Price Modified duration (years) A $95 10 B $80 12 Which bond will have the greater dollar price volatility for a 20-basis-point change in interest rates?
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(20%) Consider the following two Treasury securities: Bond Price Modified duration (years) A $95 10 B $80 12 Which bond will have the greater dollar price volatility for a 20-basis-point change in interest rates?
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%age change in price = - Modified duration x %age change in interest rate.
Dollar price volatility = Price x |%age change in price| = Price x |- Modified duration x %age change in interest rate| where |a| refers to modulus or absolute value of a.
%age change in interest rate = 20 bps = 0.2%
Hence, dollar price volatility for Bond A = 95 x |-10 x 0.2%| = 1.90
Dollar price volatility for Bond B = 80 x |-12 x 0.2%| = 1.92
Hence, Bond B has the greater dollar price volatility.
