You have purchased GOI security for Rs 5000. The security is having a duration of five...

You have purchased GOI security for Rs 5000. The security is having a duration of five years.

The market interest rates attached to the comparable securities are 8% p.a.

The markets are expecting the interest rates to decline by 1.5% p.a.

What is the likely change in the market price of the security?

Expert Solution

The market price of the security will increase due to decrease in market rates in future. Following will be the value of security.

Years	Cashflows	Interest Rate Applicable	Present Value Factor	Present Values of Cashflows
1	400	7.88%	0.9270	370.78
2	400	7.76%	0.8611	344.45
3	400	7.65%	0.8017	320.68
4	400	7.53%	0.7479	299.18
5	400	7.42%	0.6992	279.69
5	5000		0.6992	3496.15
Market Price of Security	5110.94

How Calculated

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