A variable rate bond allows o A investors to benefit from rising market interest

Question

A variable rate bond allows o A investors to benefit from rising market interest rates over time. B. issuers to benefit from rising market interest rates over time. C.investors to benefit from declining rates over time. O D. none of them QUESTION 13 Calculate the price sensitivity of a zero coupon bond with 1000s of par value and that has 2 years until maturity if interest rates go from 10% to 8%.(The answers below are the initial price of the bond (first one) and the price elasticity (second one) A. 826.45:-0.2928 O c. 826.45:-0.215 D. 821.65;-0.2212 E. 826.45:-0.1868 0 85235-02923 QUESTION 14 Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was ssued, the coupon rate of that bond will likely bethe prevailing interest rates, and the present value of the bonds will beits par value. below; above above; below below; below O above; above

Explanation / Answer

13) Initial Price = Par Value / (1 + r)^n = 1000 / (1 + 10%)^2 = $826.45

With 8% rate, Price = 1000 / 1.08^2 = $857.34

Price elasticity = - (857.34 - 826.45) / 826.45 / 2% = -0.1868

hence, E is correct

14) above, above is correct.

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