A $1,000 par value bond with Seven years left to maturity pays an interest payment semiannually...

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A $1,000 par value bond with Seven years left to maturity pays an interest payment semiannually...

A $1,000 par value bond with Seven years left to maturity pays an interest payment semiannually with an 8 percent coupon rate and is priced to have a 7.5 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much would the bond’s price change?

Bonds Price (increase/decrease) by ___________________

business finance

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Answer 1

Answer #1

Value of bond today = Present value of all future cash flows

= 1,000*8%*1/2*PVAF(3.75%, 14 periods) + 1,000*PVF(3.75%, 14 periods)

= 40*10.7396 + 1,000*0.5973

= $1,026.88

When interest rate rise to 8%, the bond will trade at par as coupon rate = market rate

Hence, bond price will DECREASE by $26.88

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Answer 2

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