Question

Consider a 10 year bond with face value $1,000, pays 6% coupon annually and has a yield-to-maturity of 7%. How much would the approximate percentage change in the price of bond if interest rate in the economy decreases by 0.80% per year?

increase by 5.55%

increase by 5.55%

increase by 5.98%

decrease by 5.98%

Answer #1

Coupon = 6% of 1000 = 60

Current price = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Current price = 60 * [1 - 1 / (1 + 0.07)^10] / 0.07 + 1000 / (1 + 0.07)^10

Current price = 60 * [1 - 0.508349] / 0.07 + 508.349292

Current price = 60 * 7.023582 + 508.349292

Current price = $929.7642

Price after decrease in interest rate.

New interest rate = 7% - 0.8% = 6.2%

Price = Coupon * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n

Price = 60 * [1 - 1 / (1 + 0.062)^10] / 0.062 + 1000 / (1 + 0.062)^10

Price = 60 * [1 - 0.547968] / 0.062 + 547.96754

Price = 60 * 7.290846 + 547.96754

Price = $985.4183

Increase = [(Ending value - beginning value) / beginning value] * 100

Increase = [(985.4183 - 929.7642) / 929.7642] * 100

**Increase = 5.98%**

6. Consider a 10 year bond with face value $1,000 that pays a
6.8% coupon semi-annually and has a yield-to-maturity of 8.4%. What
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year? Submit your answer as a percentage and round to two decimal
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after the change in interest rates?)

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Consider a 10 year bond with face value $1,000 thatpays a 6.8%
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I want to make sure that i am doing this correctly. I got
-4.26%, am i correct? If not can you give me a step by step process
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