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?

Question

Quizplus · Accepted Answer

Using the formula for bond price elasticity, we have:
Price elasticity = [(new price - old price) / (old price)] / [(new required rate of return - old required rate of return) / (old required rate of return)]
= [($567 x (1-0)) - ($1,000 x (1-0)) / ($1,000 x (1-0))] / [(15%-12%) / (12%)]
= -0.494
Since elasticity is negative, we take the absolute value of it, giving us 0.494 or approximately 0.49. Therefore, the answer is C: 0.494.

Assume That the Price of a $1,000 Zero Coupon Bond