In: Finance
A ten-year annual pay bond with a 5% coupon rate is trading with a market yield of 7.75%. What is the percentage change in price if the market yield decreases by 75 basis points immediately after the bond is issued?
Bond price with market yield of 7.75%
FV = 1,000
n = 10
cpn = 1,000 * 0.05 = 50
r = 0.0775
Bond price with market yield of 7.75% - 0.75% = 7%
r = 7% = 0.07
FV = 1,000
n = 10
cpn = 1,000 * 0.05 = 50
The bond price increases by (859.5283692061 - 813.3737661165) = $46.1546030896 when the market yield decreases by 75 basis points