Question

Bond Features
Maturity (years) =	7
Face Value =	$1,000
Starting Interest Rate	4.28%
Coupon Rate =	4%
Coupon dates (Annual)

If interest rates change from 4.28% to 6.45% immediately after you buy the bond today (and stay at the new interest rate), what is the price effect in year 2 ?

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 @ 4.28%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 0.0428

And n is the no of Compounding periods 5 years

Coupon 4%

=

= 987.63

Value of Bond @ 6.45%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 0.0645

And n is the no of Compounding periods 5 years

Coupon 4%

=

= 898.05

Change = 898.05 - 987.63 = -89.58