Solution to Problem 7-18 (9th ed., p.

251):

Bank holds $15 million in bonds having a duration of 12. If rates suddenly
rise from 6% to 7%, what percentage change in the bond’s price should
occur?

%ΔP = (ΔP/P) = -D x (Δi/(1+i)) = -12 x (+.01/1.06) = -0.1132 = -11.32%

Alternative Problem: What will the price change be if rates go from 7% to

6%?

%ΔP = (ΔP/P) = -D x (Δi/(1+i)) = -12 x (-.01/1.07) = +0.1121 = +11.21%

Be sure to use correct signs and base rates.