In duration management, how is the percent change in price of a bond calculated?

The percent change in price of a bond is calculated using modified duration, which measures the sensitivity of a bond's price to a change in interest rates. Modified duration is derived from Macaulay duration and provides a more direct way to quantify how much the price of a bond is expected to change for a 1% change in yield.

When interest rates go up, the price of bonds typically falls, and vice versa; modified duration provides an estimate of that price change by indicating the percentage change for a 100 basis points (1%) change in yield. It is a crucial tool for bond investors and portfolio managers because it helps manage the interest rate risk associated with bond investments, allowing them to anticipate potential losses or gains as market conditions fluctuate.

Other methods mentioned, such as yield-to-maturity and current yield, are important for understanding bonds but do not provide the direct calculation needed for determining price sensitivity relative to changes in interest rates. Yield-to-maturity incorporates the bond's total return but doesn't directly inform about price changes related to interest rate movements. Current yield simply gives the annual coupon divided by the bond's price and does not consider the sensitivity of the price to interest rate changes.