Question

An investor purchases a McDonalds corporate bond for $985 ($1,000 principal, paid semi-annually, maturity of 12 years, 3.3% coupon rate). What is the percentage change in the bond if the yield-to-maturity of the bond goes up +12.0% from its original level? Still assume 12 years until maturity.

-35%

+90%

-65%

+43%

Answer 1

Using the following in excel or financial calculator:

Step 1: Find the original YTM:

NPER	24	[12*2]
FV	1000
PMT	17	[1000*3.3%*1/2]
PV	985.0
Rate	1.73%	[Rate ( nper, pmt,-pv,fv)]
YTM	3.45%	[1.73%*2]

Step 2: Current bond price if YTM goes up

NPER	24	[12*2]
FV	1000
PMT	17	[1000*3.3%*1/2]
Rate	7.73%	[1.73%+ 12%/2]
PV	350.72	[-pv(rate,nper,pmt,fv,0)

Change in bond value = ( 1000 - 350.72) / 1000 = 64.92 or 65% rounded

Option -65%