In: Finance
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.
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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