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Use the bond term's below to answer the question Maturity 6 years Coupon Rate 3% Face...

Use the bond term's below to answer the question
Maturity 6 years
Coupon Rate 3%
Face value $1,000
Annual Coupons
When you buy the bond the interest rate is 4%

Right after you buy the bond, the interest rate changes from 4.00% to 2.75% and remains there.

What is the price effect in year 5 ?
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Answer #1

Answer:-

Bond

Face value = $ 1000
Maturity = 6 years
Coupons rate = 3 %
Coupon payments = 30 (annually)
Bond interest rate = 4 %

The Present Value (PV) of the bond is calculated = $ 947.58

Given the interest rate changes from 4 % to 2.75%

Therefore the Present value of bond is calculated considering the interest rate = 2.75% in the year 5
Face value = $ 1000
Number of years = 5
Coupons payment = $ 30
Bond interest rate = 2.75 %

The Present Value (PV) of the bond = $ 1011.53

As the bond prices and the interest rate are inversely related as the interest rate decreases from 4 % to 2.75 % the bond prices increases to $ 1011.53 in the year 5.

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