Question

You are required to produce a table showing bond valuesand the impact of changes in interest rate over the lifeof a bond and a diagram demonstrating the link between the changes in values(due to changes in interest rate) and time to maturity. The bond has a face value of $1,000, pays a coupon rate of 7% p.a paid annually and it is issued with 10 years to maturity. All calculations should be executed in excel.Your table should show the following:The value of the bond, year by year(from dateof issue until its maturity), assuming all other things remain the same. The value of the bond, year by year, from date of issue until its maturity, assuming that market interest rate increasesby 1.5%(hence yield to maturity increases by 1.5%), all other things remain the same.The potential%change in value, year by year, from the date of issue until its maturity.The % change in value demonstratesthe impact of the increasein interest rate on the bond value (or interest rate risk), for each year of maturity.From your table produce a diagram that demonstrates the relationship between% change in value and time to maturity. The initial market interest rate (yield to maturity) to be used is 12%. You must also show your formulas used

Answer 1

First we will calculate the present value of the bond with coupon rate of 7%, Interest rate of 12%, no of years of 10 and face value of 1000. Please find below the present value of the bond.

Particulars	Amount
Face Value of the Bond	-1000
Coupon	-70
No of years	10
Interest rate	12%
Present Value of the Bond	717.49

The present value of the bond is $717.49. We have taken the face value and the coupon amount as negative only for calculation purposes. We have used the formula PV in the excel

Now we will calculate the changes in the present value of the bond with the changes in the interest rate.

Please find below the table and the graph for the same. We have to use the PV formula to calculate the present value of the bond each year.

No of years	Face value of the bond	Coupon	Inerest Rate	Present value of the Bond
10	-1000	-70	12.00%	₹ 717.49
9	-1000	-70	13.50%	₹ 672.55
8	-1000	-70	15.00%	₹ 641.01
7	-1000	-70	16.50%	₹ 621.92
6	-1000	-70	18.00%	₹ 615.26
5	-1000	-70	19.50%	₹ 622.02
4	-1000	-70	21.00%	₹ 644.34
3	-1000	-70	22.50%	₹ 685.86
2	-1000	-70	24.00%	₹ 752.34
1	-1000	-70	25.50%	₹ 852.59