Question

for the bond below, if interest rates change from 2.00% to 3.00% immediately after you buy the bond today (and stay at the new interest rate), what is the price effect in year 3?

Bond features

maturity (years) = 5

face value = $1000

starting interest rate 3.00%

Coupon rate = 6.00%

coupon dates (annual)

Answer 1

Calculating Bond Price at the end of Year 2,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 60, N = 3, I = 0.03]

PV = $1,084.86

Calculating Bond Price at the end of Year 3,

Using TVM Calculation,

PV = [FV = 1,000, PMT = 60, N = 2, I = 0.03]

PV = $1,057.40

Price effect in Year 3 = 1,057.40 - 1,084.86

Price effect in Year 3 = -$27.46