Question

A $1,000 par value bond with five years left to maturity pays an interest payment semiannually with a 4 percent coupon rate and is priced to have a 3.6 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much would the bond’s price change? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Bond's price (Click to select)decreasedincreased by $ .

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Answer 1

Face value of bond $1,000 Coupon rate = 4% *6/12 = 2% Per period Coupon amount = Face value * Coupon rate = $1,000 * 2%-$20 Per period YTM = 3.600 * 6/12-1.800 Per period Term 5 Years * 2-10 Periods Current price of bond Coupon amount* PVIFA(YTM, n) + Maturity value PVIF(YTM, n) $20 * PVIFA(1.8% , 10) + $1,000 * PVIF(1.8%, 10) -$20 9.0773 S1,000 0.8366 = $1,018.146 If YTM increase by 0.5% , ten YTN 3.6% + 0.5%-4.1% * 6/12-2.05% Per period Price ofbond $20 * PVIFA(2.05%, 10) + $1,000 * PVIF(2.05%, 10) -$20 8.9591 +S1,000 0.8163 $995.482 Due to increase n YTM decrease bond price = $1.01 8.146-S995.482 = S22.664 Ans: Decrease in bond priceS22.664 (Decrease)