1. What is the Bonds Price Change Formula?

The bonds price change formula estimates how much a bond's price will change in response to a change in yield. It's based on the concept of duration, which measures the sensitivity of a bond's price to interest rate changes.

2. How Does the Calculator Work?

The calculator uses the bonds price change formula:

Where:

• \( Duration \) — Bond duration in years
• \( \Delta Yield \) — Change in yield (in percentage points)
• \( Price \) — Current bond price

Explanation: The negative sign indicates that bond prices move inversely to interest rates. A 1% increase in yield will cause the bond price to decrease, and vice versa.

3. Importance of Bonds Price Change Calculation

Details: Understanding how bond prices respond to interest rate changes is crucial for bond investors, portfolio managers, and risk analysts to manage interest rate risk effectively.

4. Using the Calculator

Tips: Enter the bond's duration in years, the expected change in yield as a percentage (positive for increase, negative for decrease), and the current bond price. All values must be valid.

5. Frequently Asked Questions (FAQ)

Q1: What is bond duration?
A: Duration measures a bond's sensitivity to interest rate changes, representing the weighted average time to receive all cash flows.

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 yields rise, bond prices fall.

Q3: Is this formula accurate for large yield changes?
A: This formula provides a linear approximation. For large yield changes, convexity (a second-order measure) should also be considered.

Q4: Does this work for all types of bonds?
A: The formula works best for option-free bonds. For callable or putable bonds, effective duration should be used instead.

Q5: How is duration different from maturity?
A: Duration accounts for both the timing and size of all cash flows, while maturity only considers the final payment date.