Fixed Income Markets
Estimate bond rate sensitivity
How much might a bond price fall when yields rise by 0.50 percentage points?
Practise estimate bond rate sensitivity with a worked example and a short check.
Modified duration estimates the percentage price change for a small yield change. A five-year duration gives roughly a 5% move for a one-point yield change.
Modified duration = Macaulay duration ÷ (1 + yield); Δprice / price ≈ −duration × Δyield
For a zero-coupon bond, the only cash flow arrives at year five. Modified duration is 5 ÷ 1.05 ≈ 4.76 years. Multiply by −0.005 for an approximate 2.38% loss.
A five-year zero at 5% yield has modified duration 5 ÷ 1.05 ≈ 4.76 years. A 0.50-point yield rise gives an approximate 2.38% price decline.
For a zero-coupon bond, the only cash flow arrives at year five. Modified duration is 5 ÷ 1.05 ≈ 4.76 years. Multiply by −0.005 for an approximate 2.38% loss.
For the same bond, what is the approximate effect of a 25 basis point yield decline?