Question

A 2-year zero coupon bond with a $1,000 face value has an interest rate of 3.5% per year. What would be the change in the bonds value if the 2-year interest rate were to rise by 35 basis points. (Remember: your answer needs to have a negative sign if the number is negative and should not quote in percent or basis points.)

Answer 1

Solution

Par value = $1000

Coupon rate 3.5%

YTM = 3.5% +0.35% = 3.85% to be used to discount cash flows @ coupon rate of 3.5%

Value of the bond = $ 35 / (1+0.0385)¹ + $ (35+1000) / (1+0.0385)²

= $ 35 / 1.0385 + $ 1,035 / 1.078482

= 33.7025 + 959.6820

= 993.3845

= $ 993.38

1000 - 993.38 = 6.62

The bond value would change by - 6.62