Question

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?

Answer 1

The price elasticity of the bond, based on the years to maturity and the required rate of return is -0.494

How to find the price elasticity of he bond?

First, find the new price of the bond:
= 1, 000 / ( 1 + 15%)⁵

= $497

The change in price:

= (497 - 567) / 567

= -12.3%

Then find the percentage change in the required rate of return:

= (15 - 12%) / 12

= 25%

The price elasticity of the bond is:

= -12.3% / 25%

= -0.494

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