Question

A 9-year zero coupon bond with a $1,000 face value has an interest rate of 6.1% per year. What would be the change in the bonds value if the 9-year interest rate were to rise by 18 basis points. (Remember: your answer should not quote in percent or basis points.)

A 6-year bond has an annualized nominal rate of return of 5.9%. Assuming inflation remains at 2.8% per year, what would be its compounded real rate of return over 6 years?

Answer 1

Zero coupon bond face value (Maturity amount) =					1000
Interest rate (i) =					6.10%
New interest rate (i) = 6.1 + 0.18 =					6.28%
No. of years (n) =					9
Bond price formula = Maturity amount / (1 + i) ^n
Bond price when interest rate is 6.1%
	1000 / (1+0.061)^9
	$586.90
Bond price when interest rate is 6.28%
	1000/(1+0.0628)^9
	$578.01
Change in bond's value = 586.90 - 578.01 =					$8.89
So, Bond's price has declined by $8.89 because of Interest rate rise.