Question

Company XYZ has $1,000 face value bonds issued with a 7.5% coupon rate. They mature in 10 years, call for semi-annual payments, and currently have a yield to maturity of 5.5%. How will the price of the bond change if the market interest rate climbs to 10%?

Answer 1

We will use a BA plus calculator to calculate the price of the bond-

We will insert the following inputs:

N(Number of periods) = 10years* 2= 20

I/Y(Interest rate per period) = 5.5%/2 = 2.75%

PMT (Coupon per period) =(7.5%*1000)/2 = $37.5

FV(face value) = $1000

CMPT PV
Price of the bond = $1152.27

When the interest rate climbs to 10%, price changes from $1152.27 to $844.22

N(Number of periods) = 10years* 2= 20

I/Y(Interest rate per period) = 10%/2 = 5%

PMT (Coupon per period) =(7.5%*1000)/2 = $37.5

FV(face value) = $1000

CMPT PV
Price of the bond = $844.22