Question

1. Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567.43 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 13 percent, what is the price elasticity of the bond?

   		-.980
   		+.980
   		-.522
   		+.522

Answer 1

If Required rate of return (r₀) = 12%

Price of Zero Coupon Bond (P₀) = $567.43

and,

If Required rate of return (r₁) = 13%

Price of Zero Coupon Bond (P₁) = $1000 * (1/1.13^5)

= $542.76

Now,

P-Po Price Elasticityof Bond = 7 T-ro

542.76-567.43 567,43 Price Elasticityof Bond = – 13-12

Price Elasticity of Demand = -0.0435 / 0.0833

Price Elasticity of Demand = - 0.522

Option C is correct.