Question

Consider a 10 year bond which pays 6% coupon annually and has a yield-to-maturity of 7%. How much would the price of bond change if investors required return increases to 8% per year? increase by approximately $54 decrease by approximately $52 decrease by approximately $64 increase by approximately $64

Answer 1

Given,

A 10 year coupon bond

coupon = 6%

YTM = 7%

FV = $1000

So coupon = 6% of 1000 = $60

PF is sum of present value of coupon and FV

Using Financial calculator to calculate PV

FV = 1000

PMT = 60

I/Y = 7

N = 10

Compute for PV we get PV = -929.76 of Price of the bond = $929.76

If YTM change to 8%

Using I/Y = 8

Compute for PV we get PV = -865.80. So, new price is $865.80

Price is change by 865.80 - 929.76 = $-63.96

So price of the bond decreases approximately by $64