Sturgeon has just issued 25000 AArated 6 2year semiannual co

Sturgeon has just issued 25,000 AA-rated 6% 2-year semi-annual coupon corporate bonds with a face value of £100.00. Pike is aware that AA-rated 2-year Austrian government bonds currently offer a yield of 4% p.a. and that its corporate bonds have a modified duration of 1.84. Given the information above, if the yield on the AA-rated 2-year Austrian government bond increased by 2%, the price of the Sturgeon’s corporate bonds would:

(a) Increase by 3.84%.

(b)Decrease by 3.84%.

(c) Increase by 3.68%. (

d) Decrease by 3.68%

Solution

the price of the Sturgeon’s corporate bonds would decrease by 1.84 * 2% = 3.68%

d) Decrease by 3.68%