Question

Bond Features
Maturity (years) =	6
Face Value =	$1,000
Starting Interest Rate	4.86%
Coupon Rate =	4%
Coupon dates (Annual)

If interest rates change from 4.86% to 5.66% immediately after you buy the bond today (and stay at the new interest rate), what is the price effect in year 4 ?

State your answer to the nearest penny (e.g., 48.45)

If there is a loss, state your answer with a negative sign (e.g., -52.30)

Answer 1

Value of Bond @ 4.86%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 0.0486

And n is the no of Compounding periods 2 years

Coupon 4%

=

= 983.98

Value of Bond @ 5.66%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 0.0566

And n is the no of Compounding periods 2 years

Coupon 4%

=

= 969.42

Change = 983.98 - 969.42= -14.56