A 20 year U.S. Government bond with a 10-percent annual coupon rate sells at $1,000 (par value) when prevailing interest rates on comparable securities are 10 percent. When interest rates on comparable securities drop to 8 percent this bond has a price of $1,197.90. On the other hand, when comparable rates rise to 12 percent the bond's price falls to $849.50. The price elasticity of this bond, when rates move downward from the coupon rate, must be (to the nearest thousandth place):

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The price elasticity of the bond is calculated using the formula: Elasticity = (ΔP / P) / (Δr / r), where ΔP is the change in price, P is the original price, Δr is the change in interest rate, and r is the original interest rate. Here, ΔP = $1,197.90 - $1,000 = $197.90, P = $1,000, Δr = 0.08 - 0.10 = -0.02, and r = 0.10. Plugging these values into the formula gives an elasticity of approximately -0.990.

A 20 Year U