Question

The bond consists of a 4-year, 10% annuity of $50/year plus a $500 lump sum at t=4.

What would happen if inflation fell and r declined to 7%? Find value of bond.

What is the relationship between r and the value of bond?

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =4

Bond Price =∑ [(10*500/100)/(1 + 7/100)^k]     +   500/(1 + 7/100)^4

k=1

Bond Price = 550.81

bond price is inversely proportional to YTM(r)