00:01
For this question we need to know how to calculate the value of a zero coupon bond.
00:17
The formula is going to be the face value or par value divided by 1 plus i, the yield to maturity as a decimal, raised to the number of years on the bond.
00:37
We'll call that n.
00:39
So then this is a 30 year zero coupon bond.
00:45
It has a $1 ,000 par value, a 10 % yield to maturity.
00:50
So let's calculate the value for year zero.
00:58
The face value is 1 ,000 and now there's a 10 % yield to maturity.
01:08
So it's .10.
01:11
We raise it to the number of years we have left.
01:14
It would be 30.
01:15
So then a year later the market rates increase.
01:43
So how much does she lose this first year? so in our first year we got with the yield to maturity of 10 % $57 .31 for the bond value.
01:57
The market rates increase.
01:59
So then after the increase let's calculate the bond value.
02:12
So if it had been 12 the first year what would we have gotten for this? so if we do this we'll end up with a smaller number...