Question

The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. Determine the bond's price elasticity.

Answer 1

the bond's price elasticity = - 0.67

Step-by-step explanation:

present bond value = $1100

previous bond value = $900

change in bond value = $1100 - $900 = $200

present bond percentage = 8%

previous bond percentage = 12%

% change in bond value = 8% - 12% = - 4%

Bond price elasticity =
`(change in bond value)/(previous bond value)/(change in percentage)/(previous percentage)`

=
`(200)/(900) / (-4)/(12)`

=
`(2)/(9) * -3`

= - 0.67