Question

QUESTION 18

1. Bond RTY.AF has a 5 percent coupon, makes semiannual payments, currently has 18 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

Current Market Price of the Bond will be $1,000

If the Bond Price ($1,000) is equal to the Par Value of the Bond ($1,000), then the Yield to maturity of the Bond will be equal to the Coupon rate of the Bond. ie, 5.00%

The Price of the bond if interest rates suddenly rise by 2 percent

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 5.00% x ½]	PMT	25
Market Interest Rate or Yield to maturity on the Bond [(5.00% + 2.00%) x ½]	1/Y	3.50
Maturity Period/Time to Maturity [18 Years x 2]	N	36
Bond Price/Current market price of the Bond	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $797.10.

The percentage change in the price of Bond RTY.AF

The percentage change in the price of Bond RTY.AF = [(Revised price of the Bond – Current Market price of the Bond) / Current Market price of the Bond] x 100

= [($797.10 - $1,000) / $1,000] x 100

= [-$202.90 / $1,000] x 100

= -20.29 (Negative)

“Hence, the percentage change in the price of Bond RTY.AF will be -20.29 (Negative)”