Question

6. Consider a bond with semiannual payments with 10 years to maturity, coupon of 10%, 8% as yield to maturity (YTM), and face value of 1000.

A. Find the price of the bond at t=0 Interest rates drop by 1% after 1 year.

B.Find the new price of the bond. Interest rates drop to 0% after two years from t=0.

C.Find the new price. Interest rates turn negative to -5% after 3 years from t=0.

D. Find the new price of the bond.

Answer #1

a. Price at t= 0 = 1135.90

PMT | 50 | [1000*10%*1/2] |

NPER | 20 | [10*2] |

Rate | 4.00% | |

FV | 1000 | |

PV | 1135.90 | [-pv(rate,nper,pmt,fv)] |

Price at t1 if interest rates by 1% = 1197.85

PMT | 50 | [1000*10%*1/2] |

NPER | 18 | [9*2] |

Rate | 3.50% | [7%/2] |

FV | 1000 | |

PV | 1197.85 | [-pv(rate,nper,pmt,fv)] |

b.

PMT | 50 | [1000*10%*1/2] |

NPER | 16 | [8*2] |

Rate | 0.00% | |

FV | 1000 | |

PV | 1800.00 | [-pv(rate,nper,pmt,fv)] |

c. Price = 2276.19

PMT | 50 | [1000*10%*1/2] |

NPER | 14 | [8*2] |

Rate | -2.50% | |

FV | 1000 | |

PV | 2276.19 | [-pv(rate,nper,pmt,fv)] |

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