Question

Bond RTY.AF has a 5 percent coupon, makes semiannual payments, currently has 28 years remaining to maturity, and is currently priced at par value. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond RTY.AF? Be sure to include the sign, especially if the bond price falls and the percentage change is negative. (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).

Answer 1

Number of Years to maturity = 28 (i.e., 28*2 = 56 periods)

Coupon = 1000*5% / 2 = 25

Current Price = $1000

Since Current Value of Bond = Par value ,YTM = Coupon rate = 5%

New YTM = 5% + 2% = 7% (Since Semi annual compopunding = 7% / 2 = 3.5% )

Using Financial calculator

[N = 56 ; I/Y = 3.5% ; PV = ? ; PMT = 25 ; FV = 1000 ]

New Price = $755.90

% change = [(New Price - Old Price) / Old Price] * 100

= [(755.90 - 1000) / 1000] * 100

= -24.41 (include negative sign while answering)