Canadian Securities Course (CSC) Practice Exam · Question
A portfolio manager is considering two bonds: Bond A has a modified duration of 5.5 years, and Bond B has a modified duration of 8.0 years. If interest rates are expected to rise by 50 basis points, which bond is expected to experience a larger percentage price decline?
Bonds with longer durations are more sensitive to changes in interest rates. Therefore, Bond B, with a modified duration of 8.0 years, is expected to experience
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Question: A portfolio manager is considering two bonds: Bond A has a modified duration of 5.5 years, and Bond B has a modified duration of 8.0 years. If interest rates are expected to rise by 50 basis points, which bond is expected to experience a larger percentage price decline?
Answer options:
- Bond A, because it has a shorter duration. ✅ Bond B, because it has a longer duration.
- Both bonds will experience the same percentage price change.
- Neither bond will decline if they are issued by the Canadian government.
Correct answer: Bond B, because it has a longer duration.
Explanation: Bonds with longer durations are more sensitive to changes in interest rates. Therefore, Bond B, with a modified duration of 8.0 years, is expected to experience a larger percentage price decline than Bond A.
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