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In: Finance

Assume a three-year bond with an 8% annual coupon. If rates change from 8% to 6%...

Assume a three-year bond with an 8% annual coupon. If rates change from 8% to 6% , what is the price change in the bond. Please give me dollar value per $1,000 face and % of par.

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Expert Solution

Price of the bond at interest rate of 8%:

Information provided:

Par value= future value= $1,000

Time= 3 years

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

Yield to maturity= 8%

The price of the bond is calculated by computing the present value of the bond.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 80

N= 3

I/Y=8

Press the CPT key and PV to compute the present value.

The value obtained is 1,000.

Therefore, the price of the bond at interest rate of 6% is $1,000.

Price of the bond at interest rate of 6%:

Information provided:

Par value= future value= $1,000

Time= 3 years

Coupon rate= 8%

Coupon payment= 0.08*1,000= $80

Yield to maturity= 6%

The price of the bond is calculated by computing the present value of the bond.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

PMT= 80

N= 3

I/Y=6

Press the CPT key and PV to compute the present value.

The value obtained is 1,053.46.

Therefore, the price of the bond at interest rate of 6% is $1,053.46.

Price change in the bond:

= $1,053.46 - $1,000

= $53.46.

% of par:

= $53.46 / $1,000*100

= 0.0535*100

= 5.35%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 2 years ago

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