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Assume that the price of a $1,000 zero coupon bond with five years to maturity is...

Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

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Answer #1

Bond Price Elasticity PE is the sensitivity of bond prices denoted by P to the change in the Interest rates denoted by K . The Price sensitivity is always negative.

The formula is -

now to found the Bond Prices of zero coupon bond of face value $1000 with 5 years maturity with rate of return of 15% we simply use the zero coupon bond formula

P1 = $497 (rounded off to nearest integer)

Bond Prices Notation Prices($)
P1 497
Po 567
Rate of Return Notation Rate of Return
K1 15%
K2 12%

Putting Values in formula

PE = -0.494

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