Question

In: Finance

A $ 1 comma 000$1,000 bond with a coupon rate of 5.45.4% paid semiannually has tenten...

A $ 1 comma 000$1,000 bond with a coupon rate of 5.45.4% paid semiannually has tenten years to maturity and a yield to maturity of 88%. If interest rates rise and the yield to maturity increases to 8.38.3%, what will happen to the price of the bond? A. rise by $ 17.79$17.79 B. fall by $ 17.79$17.79 C. fall by $ 21.35$21.35 D. The price of the bond will not change

Solutions

Expert Solution

First scenario:

Information provided:

Future value= $1,000

Time= 10 years*2= 20 semi-annual periods

Coupon rate= 5.4%/2= 2.7% per semi-annual period

Coupon payment= 0.027*1,000= $27

Yield to maturity= 8%/2= 4%

The price of the bond is calculated by entering the below in a financial calculator:

FV= 1,000

N= 20

PMT= 27

I/Y= 4

Press the CPT key and PV to calculate the present value of the bond.

The value obtained is $823.33.

Second scenario when yield to maturity rises to 8.3%.

The price of the bond is calculated by entering the below in a financial calculator:

FV= 1,000

N= 20

PMT= 27

I/Y= 4.15

Press the CPT key and PV to calculate the present value of the bond.

The value obtained is $805.53.

Change in price of the bond when interest rate increases:

= $823.33- $805.53

= $17.80.

Therefore, the price of the bond falls by $17.80 when interest rate increases.

Hence, answer is option b.

In case of any further queries, kindly comment on the solution.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A $ 1 comma 000$1,000 bond with a coupon rate of 6.9% paid semiannually has eight...

A $ 1 comma 000$1,000 bond with a coupon rate of 6.9% paid semiannually has eight years to maturity and a yield to maturity of 6.6%. If interest rates fall and the yield to maturity decreases by 0.8%, what will happen to the price of the bond?

A $ 5 comma 000 bond with a coupon rate of 6.6% paid semiannually has two...

A $ 5 comma 000 bond with a coupon rate of 6.6% paid semiannually has two years to maturity and a yield to maturity of 8.7%. If interest rates rise and the yield to maturity increases to 9%, what will happen to the price of the bond?

A $1,000 bond with a coupon rate of 5.8% paid semiannually has two years to maturity...

A $1,000 bond with a coupon rate of 5.8% paid semiannually has two years to maturity and a yield to maturity of 9%. If interest rates rise and the yield to maturity increases to 9.3%, what will happen to the price of the bond? A. fall by $6.19 B. fall by $5.16 C. rise by $5.16 D. The price of the bond will not change.

A $1,000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity...

A $1,000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity (YTM) of 8.30%. If the YTM increases to 8.70%, what will happen to the price of the bond? A. The price of the bond will fall by $18.93 B. The price of the bond will rise by $15.77 C. The price of the bond will fall by $20.96 D. The price of the bond will not change

1) a. Consider a $1,000 par value bond with a 6% coupon rate paid semiannually, and...

1) a. Consider a $1,000 par value bond with a 6% coupon rate paid semiannually, and has 9 years to maturity. What is the price of the bond if it is priced to yield 7%? b. Cutler Co. issued 11-year bonds a year ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If the YTM on these bonds is 8.6 percent, what is the current bond price? c. A $1000 bond with a coupon rate of 6.2%...

Assume a $1,000 face value bond has a coupon rate of 7.6 percent paid semiannually and...

Assume a $1,000 face value bond has a coupon rate of 7.6 percent paid semiannually and has an eight-year life. If investors are willing to accept a 10.9 percent rate of return on bonds of similar quality, what is the present value or worth of this bond? (Round factor value calculations to 5 decimal places, e.g. 0.52755. Round other intermediate calculations to 2 decimal places, e.g. 52.75. Round final answer to nearest dollar amount.)

The $1,000 face value Orient bond has a coupon rate of 9%, with interest paid semiannually,...

The $1,000 face value Orient bond has a coupon rate of 9%, with interest paid semiannually, and matures in 9 years. The bond current price is $856. The bond can be called in 3 years. The call premium on the bond is 7% of par. a) What is the bond's yield to maturity (YTM)? b) What is the bond’s yield to call (YTC)? c) Would an investor be more likely to earn the YTM or the YTC? Explain

A $1,000 par value bond has an 8% coupon rate (paid semiannually). It has 5 years...

A $1,000 par value bond has an 8% coupon rate (paid semiannually). It has 5 years remaining to maturity. If bond’s current price $1,085.30, what should be the YTM of this bond? a. 6% b. 3.69% c. 7.37% d. 3%

A $1,000 par value bond has an 8% coupon rate (paid semiannually). It has 5 years...

A $1,000 par value bond has an 8% coupon rate (paid semiannually). It has 5 years remaining to maturity. If current market interest rate is 6%, what should be the current price of this bond? a. $1,000 b. $1,268.40 c. $918.89 d. $1,085.30

Suppose a seven-year, $ 1 comma 000$1,000 bond with anan 8.3 %8.3% coupon rate and semiannual...

Suppose a seven-year, $ 1 comma 000$1,000 bond with anan 8.3 %8.3% coupon rate and semiannual coupons is trading with a yield to maturity of 6.63 %6.63%. a. Is this bond currently trading at a discount, at par, or at a premium? Explain. b. If the yield to maturity of the bond rises to 7.45 %7.45% (APR with semiannual compounding), what price will the bond trade for? a. Is this bond currently trading at a discount, at par, or at...

Subjects