For a ten-year $1,000,000-face-value zero-coupon Treasury bond, how does its market price change when the interest rate goes from 6.84% to 6.92%?
A) A fall of $1192
B) A fall of $3848
C) A fall of $8000
D) A rise of $8000

Question

Quizplus · Accepted Answer

To calculate the bond's price change, we need to use the formula:

Price = Face Value / (1 + r)^n

where r is the yield to maturity and n is the number of years to maturity. We can use this formula twice, once for each interest rate, and then subtract the second price from the first:

Price1 = 1,000,000 / (1 + 0.0684)^10 = $495,348.55
Price2 = 1,000,000 / (1 + 0.0692)^10 = $491,500.77
Change in price = $495,348.55 - $491,500.77 = $3,847.78

Since the interest rate increased, the price of the bond decreases. The most accurate answer is B, a fall of $3848.

For a Ten-Year $1,000,000-Face-Value Zero-Coupon Treasury Bond, How Does Its