How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest rates increase to 12% one year later?

Amount An investor lose =$19.9202783

Explanation:

Par value of zero-coupon bond=$1,000

Interest rate at maturity=10%

One year later, increase in interest rate=12%

Required:

How much would an investor lose the first year?

Solution:

Formula:

In our case:

FV is the par value of bond=$1,000

PV is we have to calculate.

i is the interest rate=10%=0.1

n is the number of years=30 years

Now after one year:

n will become 29 years

i is 12%=0.12

Amount An investor lose =Amount before increase in IR-Amount after increase in IR

Amount An investor lose =

Amount An investor lose =$57.3085533-$37.388275

Amount An investor lose =$19.9202783

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