A 20 Year U

Multiple Choice

A 20 year U.S. Government bond with a 10-percent annual coupon rate sells at $1,000 (par value) when prevailing interest rates on comparable securities are 10 percent. When interest rates on comparable securities drop to 8 percent this bond has a price of $1,197.90. On the other hand, when comparable rates rise to 12 percent the bond's price falls to $849.50. The price elasticity of this bond, when rates move downward from the coupon rate, must be (to the nearest thousandth place) :

A) -0.990
B) -0.779
C) -0.550
D) -0.880
E) None of the above