Question

Shady Rack Inc. has a bond outstanding with 9.75 percent coupon, paid semiannually, and 17 years...

Shady Rack Inc. has a bond outstanding with 9.75 percent coupon, paid semiannually, and 17 years to maturity. The market price of the bond is $1,042.43. Calculate the bond’s yield to maturity (YTM). Now, if due to changes in market conditions, the market required YTM suddenly increases by 2% from your calculated YTM, what will be the percent change in the market price of the bond?

A.

-17.76%
B.

-14.87%
C.

-15.66%
D.

-16.39%
E.

-17.09%
F.

-14.01%
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Homework Answers

Answer #1

Given about Shady Rack Inc.'s bond,

Face value = $1000

coupon rate = 9.75% paid semiannually

years to maturity = 17 years

Market price of the bond = $1042.43

So, Semiannual coupon payment = (9.75%/2) of 1000 = $48.75

Yield to maturity of the bond can be calculated on financial calculator using following values:

FV = 1000

PV = -1042.43

PMT = 48.75

N = 2*17 = 34

Compute for I/Y, we get I/Y = 4.625

So, YTM of the bond = 2*4.625 = 9.25%

Now YTM is increased by 2%, so new YTM = 2+9.25 = 11.25%

Price

of the bond can be calculated on financial calculator using following values:

FV = 1000

I/Y = 11.25/2 = 5.625

PMT = 48.75

N = 2*17 = 34

Compute for PV, we get PV = -887.41

So, new price of the bond = $887.41

So, percentage change in price = (new price - old price)/old price = (887.41 - 1042.43)/887.41 = -14.87%

Option B is correct.

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