Question

In: Finance

A ten-year annual pay bond with a 5% coupon rate is trading with a market yield...

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?

Solutions

Expert Solution

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


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