Question

9-

Bond Features
Maturity (years) =	8
Face Value =	$1,000
Starting Interest Rate	3.81%
Coupon Rate =	3%
Coupon dates (Annual)

If interest rates change from 3.81% to 5.42% 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 @ 3.81%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 0.0381

And n is the no of Compounding periods 4 years

Coupon 3%

=

= 970.47

Value of Bond @ 5.42%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 0.0542

And n is the no of Compounding periods 4 years

Coupon 3%

=

= 915.02

Change = 915.02 - 970.47 = -55.45