Question

A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield rises to 6% from the current level of 5.5%?

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 on how to find the answer?

Answer 1

Price of the Bond on Current market yield of 5.5%

= Intt * PVAF(5.5%,12years) + Maturity Value * PVF(5.5%,12years)

= 50 * 8.619 + 1000 * 0.526

= 957 (approax.)

Price of bond on new Market yield i.e 6%

= 50 * 8.384 + 1000 * 0.497

= 916 (Approax.)

% Change in Bond Price

= (New - Old)/Old*100 = (916-957)/957*100 = -41/957*100 = -4.28% (Approax.)

Dear

Your answer seems to be correct, the difference of 0.02% is basically due to how many decimals you have taken , in my case i took 3 decimals on Discounting Factors.

Happy Learning!