Question

Consider a 15-year zero-coupon bond with 10% annual coupon rate. By what percentage will the price of this bond change if its yield to maturity increases from 5% to 6%?

The price decreases by

    

Select one:

A. 11.8%

B. 13.2%

C. 12.1%

D. 14.2%

Answer 1

The decrease in price is computed as shown below:

Value of bond if YTM is 5% is computed as follows:

= $ 1,000 / 1.05¹⁵

= $ 481.0170981

Value of bond if YTM is 6% is computed as follows:

= $ 1,000 / 1.06¹⁵

= $ 417.2650607

So, the % decrease in price will be as follows:

= ($ 417.2650607 - $ 481.0170981) / $ 481.0170981

= - $ 63.75203736 / 481.0170981

= 13.2% Approximately (Decrease)

Feel free to ask in case of any query relating to this question