Terry owns a thirty-year zero-coupon bond priced at $304.78. If interest rates increase by 50 basis...

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Terry owns a thirty-year zero-coupon bond priced at $304.78. If interest rates increase by 50 basis points, how much will the

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Answer 1

Answer #1

Select - (d) ............The price will decrease more than 10 %

For a zero coupon bond, bond duration will be equal to its maturity.

Hence in the given case, bond duration = 30

This means that ........... for 1% change in interest rate, 30% change will come in bond price ( approximation ).

It was given that interest rates increase by 50 basis points, which means 1/2 percent. increase in interest rate........ which means 30 * 1/2 = 15 % decrease in bond price.

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Answer 2

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