Chartered Retirement Planning Counselor (CRPC) Practice Exam 2025 – Comprehensive All-in-One Guide for Exam Success!

To understand why an approximate 16% decline is the correct response for a bond with an 8-year duration when interest rates rise by 2%, it's essential to grasp the concept of duration and its impact on bond prices.

Duration is a measure of a bond's sensitivity to changes in interest rates. Specifically, it estimates how much a bond’s price is expected to change for a 1% change in interest rates. For instance, if a bond has a duration of 8 years, it implies that for each 1% increase in interest rates, the bond's price would decrease by approximately 8%.

If interest rates rise by 2%, we can extend this relationship. For an 8-year duration bond, each percentage point increase in interest rates corresponds to an 8% decline in the bond's price. Therefore, a 2% increase in interest rates would lead to a total price decline of about 16% (8% decline for each percentage point multiplied by 2).

This understanding connects to the broader principle of bond pricing where an inverse relationship clearly exists between interest rates and bond prices. Thus, as interest rates go up, existing bond prices fall, and this effect becomes more pronounced with higher durations.