Question

You have bought a bond which carries a coupon rate of 8 percent, has 7 years until maturity, and sells at a yield to maturity of 7 percent.

Show your calculations and answer the following questions

1. What coupons do bondholders receive each year?

2. What is the price that you paid for this bond? (Assume annual coupon payments)

3. What will happen to the bond price if the yield to maturity rises to 9 percent? (give

   theoretical and calculation answers)

Answer 1

Q1
Coupon payment each year = 1000 * 8%	80
Q2
Price of bond = Coupon * ( 1-(1+r)^-n ) / r + Redemption value * 1/(1+r)^n
Price of bond = 80 * ( 1-(1+7%)^-7 ) / 7% + 1000 * 1/(1+7%)^7	1053.89
Q3
If the yield to maturity increases, then the price of bond will decrease
Price of bond = Coupon * ( 1-(1+r)^-n ) / r + Redemption value * 1/(1+r)^n
Price of bond = 80 * ( 1-(1+9%)^-7 ) / 9% + 1000 * 1/(1+9%)^7	949.67

If you have any doubt then please ask

Please do rate the answer