Question

# CraMerica has 8% coupon bond issue with 8 years to maturity. Each of these bonds make...

CraMerica has 8% coupon bond issue with 8 years to maturity. Each of these bonds make semi-annual interest payments. These bonds have a yield to maturity of 10%. Suddenly, the yield to maturity on these bonds fall to 8%. What is the percentage change in the price of these bonds. Assume a par value of \$1,000. Enter your answer to two decimal plances with no percentage sign. That is, like this: 13.61

Price of semi-annual interest bond

= Semi-annual interest * PVIFA [Yield to maturity/2, (Period*2)] + Maturity value * PVIF [Yield to maturity/2, (Period*2)]

Price of the bond when  yield to maturity is 10%

= \$40 * PVIFA [5 %, 16] + \$1000 * PVIF [5 %, 16]

=(\$40 *10.8378) + (\$1000 *  0.4581)

= \$892

Price of the bond when  yield to maturity is 8%

Note : When coupon rate of the bond =  yield to maturity of the bond, then price of the bond = face value of the bond

= \$1000

Percentage change in the price of these bonds

= (Price of the bond when  yield to maturity is 10% - Price of the bond when  yield to maturity is 8%) / Price of the bond when  yield to maturity is 10%

= (\$892 - \$1000 ) / \$892 = 12.11

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