Using the elasticity approach,estimate the change in the price of a $500 000 90-day bank-accepted bill when the yield increases from 5% to 6%.

Question

Quizplus · Accepted Answer

The original price of the bill can be found by inserting the face value of $500 000,a yield of 5% and 90-day maturity into equation 5.1,page 138.This results in a price of $98 782.14.To estimate the price change from the change in yield involves application of equation 5.8,page 144.Using the original price of $98 782.14,an elasticity measure of -1 and a % change in (1 + yield)of -0.00244 results in an estimated price change of $240.53.

Using the Elasticity Approach,estimate the Change in the Price of a $500