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One year ago, the ABC company issued 20-year bonds at par. The bonds have a coupon...

One year ago, the ABC company issued 20-year bonds at par. The bonds have a coupon rate of 5 percent and pay interest annually. Today, the market rate of interest on these bonds is 5.6 percent. How does today’s price of this bond compare to the issue price? (Answer the percent price change)

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Answer #1

The bond was issued 1 year ago with the 20-year maturity, so after 1 year time left to maturity is 19 years.

Let Face value = $1000

Time to maturity = 19 years

Coupon payment = 5% of 1000 = $50

Current market rate = 5.6%

Using financial calculator,

N = 19, I/Y = 5.6, PMT = -50, FV = -1000 and compute PV = 930.9066

Current Price = $930.9066

Price one year ago = $1000 (as it was issued at par)

Percentage Change in Price = [(930.9066 - 1000)/1000] x 100 = -6.9093%

Negative sign indicates the fall in price. Therefore, the bond price fall by 6.91%.

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