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Assume you have a 20-year semi-annual zero-coupon bond with $1,000 face value
Assume you have a 20-year semi-annual zero-coupon bond with $1,000 face value. The market rate increases from 3% to 4%. What is the change in the bond's market value?
Group of answer choices
$98
-$111
-$98
$111
No change
Expert Solution
Computation of Price of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
When Market Interest Rate is 3%:
Here,
PV = Price of Bond = ?
Rate = 3%
Nper = 20 years
PMT = 0
FV = $1,000
Substituting the values in formula:
=-pv(3%,20,0,1000)
PV or Price of Bond = $553.68
When Market Interest Rate is 4%:
Here,
PV = Price of Bond = ?
Rate = 4%
Nper = 20 years
PMT = 0
FV = $1,000
Substituting the values in formula:
=-pv(4%,20,0,1000)
PV or Price of Bond = $456.39
Change in Bond's Market Value = ($553.68-$456.39) = $97.29 or $98
So, the correct option is 1st "$98".
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