Question

In: Finance

A $1,000 bond with a coupon rate of 5.8​% paid semiannually has two years to maturity...

A

$1,000

bond with a coupon rate of

5.8​%

paid semiannually has

two

years to maturity and a yield to maturity of

9​%.

If interest rates rise and the yield to maturity increases to

9.3​%,

what will happen to the price of the​ bond?

A.

fall by $6.19

B.

fall by $5.16

C.

rise by $5.16

D.

The price of the bond will not change.

Solutions

Expert Solution

Face/Par Value of bond = $1000

Sem-annual Coupon Bond = $1000*5.8%*1/2

= $29

No of coupon paymenst(n) = 2 years*2 = 4

i) Current semi-annual YTM = 9%/2 = 4.5%

Calculating the Market price of Bond:-

Price = $104.038 + $838.561

Price = $942.60

ii) Now YTM increased to 9.3%

Current semi-annual YTM = 9.3%/2 = 4.65%

Calculating the Market price of Bond:-

Price = $103.6741 + $833.764

Price = $937.44

Thus, when YTm increased from 9% to 9.3%, the Price fall by $5.16($942.60 - $937.44)

option B

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