Question

A zero coupon bond, with a face value of $1,000, will mature in 15 years. The current yield to maturity for this bond is 10%. If the yield to maturity drops by one percent, by what percentage will the market price rise or fall?

a) +14.68%

b) +12.80%

c) +17.33%

d) -14.68%

e) -12.80%

Answer 1

The correct option is "A".

We need to find the present value of the bond under both the yields and then check the difference.

You need to use Financial calculator to solve this problem. You can download it.

N = 15 (The Bond is for 15 Years)

FV = 1,000 (The Face value of bond is $1,000)

I/Y = 10 (Current yield is 10%)

CPT + PV = 239.39

So price of bond is $239.39

Now change the I/Y from 10 to 9,

I/Y = 9 (Yield drop by 1%)

CPT + PV = 274.53

So the price of the bond increased from $239.39 to $274.53

Percentage increase is = New - old / old

=14.68%