Question

A 4 year Bond with face value $2000 has a coupon rate of c=10%, and market interest rates on 4 year bonds are 5%.
d. If 4 year interest rates (YTMs) are expected to rise by 25 basis points, by how much do you expect the price to change? (give an answer as a percentage to 2 decimal places)

Answer 1

The price of the bond with YTM = 5%

N = 4 I/Y = 5 PMT = 200 FV = 2,000

CPT PV

PV = -2,354.59505

The price of the bond with YTM = 5% is $2,354.59505

The price of the bond with YTM = 5.25%

N = 4 I/Y = 5.25 PMT = 200 FV = 2,000

CPT PV

PV = -2,334.918193

The price of the bond with YTM = 5.25% is $2,334.918193

Change in price = (2,334.918193 - 2,354.59505)/2,354.59505

Change in price = -0.008356790268 = -0.8356790268%

Change in price = -0.84%

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