Question

Given the original price of a 20-year bond with a par of 1,000 and a 8.0% coupon rate that is paid half-yearly is 923. If the yield of the bond rises 1% from the original, what is the impact on the price of the bond?

Answer 1

Tenure of bond = 20 years
Coupon Rate C = 8%
Coupon Payment = Semi annually
So, No of Coupon Payments = 20*2 = 40, Amount of coupon payment = 1000* 4% = 40
Face Value or Par Value = 1000
Coupon rate = 8/2 = 4%
Price = 923

Impact on price of bond if yield rises by 1%

So first we will have to calculate the current yield (YTM) of the bond, for which we will use the financial calculator
PV ie. present price = 923
FV ie. Par value = 1000
PMT ie. Coupon = 40
N ie no of coupon payments = 40
Yield i,e YTM = ? (I/Y)

So insert all values in calculator and press compute I/Y button to find current yield which is 4.41%

So current yield is 4.41% which is 6 monthly yield, so annual yield is 4.41*2 = 8.82 ,

Now if yield rises by 1% what will be the impact on price so, now again we will use financial calculator to calculate price of bond at 9.82% yield for 6 month then 4.91%

I/Y = 4.91%
PMT = 40,
N = 40,
FV = 1000
PV i.e. price = ?

Price is 841.91

Answer - If yield rises by 1% then price of bond falls from 923 to 841.91