Question

In: Finance

Bond A pays 8.8 % coupons and is priced at par value. It has 2 years...

Bond A pays 8.8 % coupons and is priced at par value. It has 2 years to maturity. If interest rates suddenly rise by 1.4%, what is the percentage change in price of Bond A? What is the now the price of Bond A?

Expert Solution

New Price of Bond is $ 975.77 with the percentage change in the price of bond by -2.42%

A bond has face value of $ 1,000. When bonds are priced at par then it means that price of bond is equal to its face value.

So, current price of bond is $1,000.

Further, when bonds are price at par, Yield to maturity(YTM) and coupon rate is also same.

YTM rate is used to discount cash flows from bond.

# 1

Changed price of bond

=

=-pv(rate,nper,pmt,fv)

Where,

=

$ 975.77

rate

=

Discount rate

=

10.20%

nper

=

Time

=

2

pmt

=

Coupon Payment

=

$ 88

fv

=

Maturity value

=

$ 1,000

# 2

Percentage change in price of bond

=

(b-a)/a

Where,

=

-2.42%

a

=

Existing price

=

$ 1,000

b

=

Changed rice

=

$ 975.77

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