The Corner Grocer has an 8-year, 7 percent annual coupon bond outstanding with a $1,000 par...

The Corner Grocer has an 8-year, 7 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 6.4 percent. Which one of the following statements is correct if the yield to maturity suddenly increases to 7.3 percent?

a. The bond price will decrease by $55.21.

b. The bond price will increase by 5.25 percent.

c. The bond price will decrease by 5.11 percent.

d. The bond price will increase by $58.69.

e. The bond price will decrease by 5.25 percent.

Expert Solution

BOND PRICING	Basics		Annual Percentage Rate

Inputs
Rate Convention: 1 = EAR, 0 = APR	0
Annual Coupon Rate (CR)	7.0%
Yield to Maturity (Annualized) (y)	6.4%
Number of Payments / Year (NOP)	1
Number of Periods to Maturity (T)	8
Face Value (FV)	$1,000

Outputs
Discount Rate / Period (RATE)	6.4%
Coupon Payment (PMT)	$70

Calculate Bond Price using the Cash Flows
Period	0	1	2	3	4	5	6	7	8
Time (Years)	0.0	1.0	2.0	3.0	4.0	5.0	6.0	7.0	8.0
Cash Flows		$70.00	$70.00	$70.00	$70.00	$70.00	$70.00	$70.00	$1,070.00
Present Value of Cash Flow		$65.79	$61.83	$58.11	$54.62	$51.33	$48.24	$45.34	$651.40
Bond Price	$1,036.68

Calculate Bond Price using the Formula
Bond Price	$1,036.68	0

BOND PRICING	Basics		Annual Percentage Rate

Inputs
Rate Convention: 1 = EAR, 0 = APR	0
Annual Coupon Rate (CR)	7.0%
Yield to Maturity (Annualized) (y)	7.3%
Number of Payments / Year (NOP)	1
Number of Periods to Maturity (T)	8
Face Value (FV)	$1,000

Outputs
Discount Rate / Period (RATE)	7.3%
Coupon Payment (PMT)	$70

Calculate Bond Price using the Cash Flows
Period	0	1	2	3	4	5	6	7	8
Time (Years)	0.0	1.0	2.0	3.0	4.0	5.0	6.0	7.0	8.0
Cash Flows		$70.00	$70.00	$70.00	$70.00	$70.00	$70.00	$70.00	$1,070.00
Present Value of Cash Flow		$65.24	$60.80	$56.66	$52.81	$49.22	$45.87	$42.75	$608.96
Bond Price	$982.29

Calculate Bond Price using the Formula
Bond Price	$982.29

Ans: A) The bond price will decrease by $55.21

jeff jeffy answered 2 years ago

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