Question

A 1,000$ par value bond with five years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much would the bond's price change ? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Bonds price _______ by __________ ? .

Answer 1

Face Value of Bond = $1000

Semi-annual coupon payment = $1000*6%*1/2

= $30

n = no of years to maturity*2

= 5*2

= 10

Current yield to maturity = 5%

Semi-annual YTM = 5%/2 = 2.5

Calculating the Price of bond with YTM as 5%:-

Price = $262.563 + $781.198

Price = $1043.76

- If interest rates surprisingly increase by 0.5 percent to 5.5%.

Semi-annual YTM = 5.5%/2 = 2.75%

Calculating the Price of bond with YTM as 5.5%:-

Price = $259.203 + $762.398

Price = $1021.60

So, with increase in Interest rate by 0.5% the price of bond is decreased by $22.16 ($1043.76- $1021.60)

Thus, Bonds price Decrease by $22.16

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