Question

Calvin and Andre both have bonds they bought at par value which pay a 10.25% coupon rate. Calvin's bond has 10 years to maturity and Andre's bond has 20 years to maturity. If interest rates suddenly rise to 12.25%, what is the approximate change in value of Calvin's bond?

Multiple Choice

• -14.81%

• 14.81%

• 11.35%

• -11.35%

Answer 1

Given about Calvin's bond,

Face value = $1000

Since bond is priced at par, its price = face value

=> price of the bond = $1000

coupon rate = 10.25% paid semiannually,

So, semiannual coupon = (10.25%/2) of 1000 = $51.25

years to maturity = 10 years

If YTM suddenly increased to 12.25%, new price of the bond can be calculated using financial calculator with following values:

FV = 1000

N = 10*2 = 20

PMT = 51.25

I/Y = 12.25/2 = 6.125

Solve for PV, we get PV = -886.46

So, new price of the bond = 886.46

Change in price = (new price - old price)/old price = (886.46 - 1000)/1000 = -11.35%

Option D is correct.

answered by: anonymous