dstefan
06-06-2008, 12:43 AM
Chapter 2, Problem 14
By how much would the price of a ten year zero-coupon bond change if the yield increases by ten basis points?
(One percentage point is equal to 100 basis points. Thus, 10 basis points is equal to $0.001$.)
Solution:
Since the duration of a zero--coupon bond is equal to the maturity of the bond, we find that D = T = 10. Since, for small changes \Delta y in the yield, the percentage change in the value of a bond is proportional to - \Delta y ~D, we conclude that the price of the bond decreases by $-0.01, i.e., by 1\%.
By how much would the price of a ten year zero-coupon bond change if the yield increases by ten basis points?
(One percentage point is equal to 100 basis points. Thus, 10 basis points is equal to $0.001$.)
Solution:
Since the duration of a zero--coupon bond is equal to the maturity of the bond, we find that D = T = 10. Since, for small changes \Delta y in the yield, the percentage change in the value of a bond is proportional to - \Delta y ~D, we conclude that the price of the bond decreases by $-0.01, i.e., by 1\%.