Economics · Bond Markets
If market interest rates increase as a result of a policy repo rate hike, what will be the immediate impact on the market price of existing fixed-rate bonds, and how does 'Modified Duration' help quantify this risk?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The market price will decrease; Modified Duration measures the credit risk of the issuer.
- 2There will be no change in price as coupons are fixed; Modified Duration only applies to equity shares.
- 3The market price will decrease; Modified Duration measures the approximate percentage change in a bond's price for a 1% change in its yield.✓
- 4The market price will increase; Modified Duration measures the time taken to recover the principal.
Correct answer
The market price will decrease; Modified Duration measures the approximate percentage change in a bond's price for a 1% change in its yield.
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