1. What is Bond Price Change Calculation?

The bond price change calculation estimates how much a bond's price will change in response to changes in interest rates. It uses duration as a measure of interest rate sensitivity to predict price movements.

2. How Does the Calculator Work?

The calculator uses the bond price change formula:

Where:

• \( \Delta P \) — Bond price change (currency units)
• \( Duration \) — Modified duration (years)
• \( \Delta r \) — Interest rate change (decimal)
• \( P \) — Current bond price (currency units)

Explanation: The formula shows that bond prices move inversely to interest rates. Higher duration means greater price sensitivity to rate changes.

3. Importance of Bond Price Sensitivity

Details: Understanding bond price sensitivity helps investors manage interest rate risk, optimize portfolio duration, and make informed investment decisions in changing rate environments.

4. Using the Calculator

Tips: Enter modified duration in years, interest rate change as a decimal (e.g., 0.01 for 1%), and current bond price. All values must be valid positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is modified duration?
A: Modified duration measures the percentage change in bond price for a 1% change in yield. It's a key metric for interest rate risk management.

Q2: Why is there a negative sign in the formula?
A: The negative sign reflects the inverse relationship between bond prices and interest rates - when rates rise, bond prices fall, and vice versa.

Q3: How accurate is this calculation?
A: This provides a linear approximation. For large rate changes, convexity adjustments may be needed for greater accuracy.

Q4: What affects a bond's duration?
A: Duration increases with longer maturity, lower coupon rates, and lower yield to maturity.

Q5: Can this be used for bond portfolios?
A: Yes, by using the portfolio's weighted average duration, this formula can estimate price changes for entire bond portfolios.