Question

Bond Features

Maturity (years) = 9

Face Value = $1,000 Starting

Interest Rate 3.28%

Coupon Rate = 5%

Coupon dates (Annual)

If interest rates change from 3.28% to 6.39% 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

The price effect will be depicted by the difference in the price of Bond in years 4 at rate of 3.28% & 6.39%

Value of Bond @ 3.28%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 0.0328

And n is the no of Compounding periods 5 years

Coupon 5%

=

= 1078.15

Value of Bond @ 6.39%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 0.0639

And n is the no of Compounding periods 5 years

Coupon 5%

=

= 942.06

Change = 942.06 - 1078.15 = -136.09