Question

Bond Dave has a 7 percent coupon rate, makes semiannual payments, a 9 percent YTM, and 5 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Dave? Enter the answer with 4 decimals (e.g. 0.0123).

Answer 1

Given about Dave bond's,

Coupon rate = 7% paid semiannually,

Let face value be $1000

so, semiannual coupon payment = (7%/2) of 1000 = $35

YTM = 9%

Years to maturity = 5 years

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

FV = 1000

PMT = 35

I/Y = 9/2 = 4.5

N = 2*5 = 10

compute for PV, we get PV = -920.87

So, current price of the bond = $920.87

When interest rate increases by 2%, new YTM = 9 + 2 = 11%

So, now use following values to compute PV

FV = 1000

PMT = 35

I/Y = 11/2 = 5.5

N = 2*5 = 10

compute for PV, we get PV = -849.25

So, new price of the bond = $849.25

So, percentage change in price = (New price - old price)/old price = (849.25 - 920.87)/920.87 = -7.78%

So, the percentage change in price of Bond Dave is -7.78% of -0.0778