Question
You buy a 30 year, $1,000 zero coupon bond that is selling at a YTM of 6% (the 6% is the Bond Equivalent Yield in
You buy a 30 year, $1,000 zero coupon bond that is selling at a YTM of 6% (the 6% is the Bond Equivalent Yield in other words the Annual Percentage Rate is 6% compounded semiannually, or 3.0% each 6 months. Therefore use a value of 2 for m in the approximation equation.) Right after you buy the bond the YTM declines to 5%. Use the approximation relation that exists between the percentage price change and the duration of a bond to estimate the percentage change in the bonds price due to the change in the YTM. Compute the exact percentage change for comparison purposes.
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