Question

Bond Parameters:

par value: $1000

maturity: 5 years

coupon interest %: 8%

market interest %: 7%

Use bond duratikn to estimate the future price of the bond if interest rates increase by 2%

Answer 1

	Year	Cash flow	PVIF at 7%	PV at 7%	t*PV
	1	$          80.00	0.93458	$       74.77	$         74.77
	2	$          80.00	0.87344	$       69.88	$       139.75
	3	$          80.00	0.81630	$       65.30	$       195.91
	4	$          80.00	0.76290	$       61.03	$       244.13
	5	$    1,080.00	0.71299	$     770.03	$   3,850.13
				$ 1,041.00	$   4,504.68
1)	Bond duration = 4504.68/1041.00 =			4.33	years
2)	If interest rate increases by 2%, the price of the bond will
	change by -2%*4.33 =		-8.66%
	Current price = 1000/1.07^5+80*(1.07^5-1)/(0.07*1.07^5) =					$      1,041.00
	Bonds future price = 1041.00*(100%-8.66%) =					$          950.85