Consider a $1,000 face value zero-coupon bond with 25 years to maturity. Suppose that the yield-to-maturity (APR, annually compounded) on this bond unexpectedly changed today from 8% to 6%.

a) What is the actual percentage price change of this bond?

b) Calculate the duration of this bond when the yield-to-maturity was 8%. Approximately, what is the percentage price change of this bond implied by duration when the yield-to-maturity decreases from 8% to 6%?

c) By how much does the duration overestimate or underestimate the actual price change (in $)

Answer rating: 100% (QA)

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