Question

Consider two bonds, a 3-year bond paying an annual coupon of 6.90% and a 10-year bond also with an annual coupon of 6.90%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 12%.

a. What is the new price of the 3-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

a)	Par/Face value	1000
	Annual coupon rate	0.069
	Annual coupon	69
	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 12% and t is the time period in years.
	Price of the bond = sum of present value of future cash flows
	t	1	2	3
	future cash flow	69	69	1069
	present value	61.61	55.01	760.89
	sum of present values	877.51
	The new price of the 3 year bonds is $877.51.
b)	Par/Face value	1000
	Annual coupon rate	0.069
	Annual coupon	69
	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 12% and t is the time period in years.
	Price of the bond = sum of present value of future cash flows
	t	1	2	3	4	5	6	7	8	9	10
	future cash flow	69	69	69	69	69	69	69	69	69	1069
	present value	61.61	55.01	49.11	43.85	39.15	34.96	31.21	27.87	24.88	344.19
	sum of present values	711.84
	The new price of the 10 year bonds is $711.84.