A junior analyst considers a 10-year high-yield bond issued by EKN Corporation (EKN) position in a high-yield
Question:
A junior analyst considers a 10-year high-yield bond issued by EKN Corporation (EKN) position in a high-yield portfolio. The bond has a price of 91.82, a modified duration of 8.47, and a spread duration of 8.47. The analyst speculates on the effects of an interest rate increase of 20 bps and, because of a change in its credit risk, an increase in the EKN bond’s credit spread of 20 bps. The analyst comments that because the modified duration and the credit spread duration of the EKN bond are equal, the bond’s price will not change (all else being equal) in response to the interest rate and credit spread changes.
Is the analyst’s prediction correct that the EKN bond price will not change in response to the interest rate and credit spread changes, all else being equal?
A. Yes.
B. No, the bond price should decrease.
C. No, the bond price should increase.
Step by Step Answer: