How 1 basis point increase in the prevailing interest rate

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A 5-year, zero-coupon bond offers an interest rate of 8% per annum.

(a) How does a 1-basis-point increase in the prevailing interest rate change the value of this bond?

(b) What is the ratio of the value change over the interest change? In calculus, this would be called the derivative of the value with respect to interest rate changes.

(c) How does the derivative of wealth with respect to the interest rate vary with the length of the bond?

Reference no: EM131234447

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