Question

1. What happens to the price of a 3-year bond (with par value $1,000) with an 8% coupon when interest rates change from 8 to 6%? OD. A price decrease of $53.47 OC.A price increase of $53.47 OB.A price decrease of $51.54 O A.A price increase of $51.54

Answer 1

Price at 6% = present value of coupon payments + present value of face value PMT*(1-(1/(1+r^n)}}/r+ (face value/(1+r)^n $1,053.46 80*(1-(1/(1.0613)}}/0.06+(1000/1.0613) Change in price = $53.47 [ 1053.46-1000] Answer: C. A price increase of $53.47