Question

Microsoft has 15 year bond which pays 1.08 percent interest monthly. The bond has a face value of $1,000. If interest rates increase to 1.14 percent what is the percentage change in the price of this bond?

Group of answer choices

8.27 percent decrease

0.82 percent decrease

0.09 percent increase

9.91 percent increase

9.91 percent increase

Answer 1

Calculation of price of the bond @ 1.08%:

FV = 1000
Nper = 15 * 12 = 180
Rate = 1.08% / 12
PMT = 0

Price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(1.08%/12,180,0,-1000)
= $850.50

Calculation of price of the bond @ 1.14%:

FV = 1000
Nper = 15 * 12 = 180
Rate = 1.14% / 12
PMT = 0

Price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(1.14%/12,180,0,-1000)
= $842.89

Percentage change in price of the bond = ($842.89 - $850.50) / $850.50
= -7.61 / 850.50
= -0.89%

Percentage change in price of the bond = 0.89% decrease.

Select the closest option (0.82 percentage decrease).