Use the excel spread sheet to calculate the (change in) bond prices and a standard calculator to calculate the relative change. Both bonds have a face value of AUD 1000 and time to maturity of 10 years. However, Bond A is a zero coupon bond and Bond B has AUD 100 coupons. How do the prices (present values) of the two bonds change if the market yield is increasing from 10% to 20%? Which bond reacts stronger to the change in market yields?

1.The initial prices are 385.54 and 1000. The yield increase will diminish the prices to 161.51 and 580.75. The zero coupon bond reacted relatively little with the price dropping by less than AUD 300 whilst the coupon bond dropped by more than AUD 400.

2.The initial prices are 385.54 and 1000. The yield increase will diminish the prices to 161.51 and 580.75. The zero coupon bond reacted stronger with a price drop of 58 % versus a drop of 42 % for the coupon bond.

3.Coupon bonds are also called Fixed Income Securities, so there is no price drop.