A $1,000 par value bond with six years left to maturity pays an interest payment
ID: 2637567 • Letter: A
Question
A $1,000 par value bond with six years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5.6 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much would the bond
A $1,000 par value bond with six years left to maturity pays an interest payment semiannually with a 6 percent coupon rate and is priced to have a 5.6 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much would the bond
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Nper = 6*2 = 12 (indicates the period over which interest payments are made)
PMT = 1000*6%*1/2 = 30 (indicates the amount of interest payment)
FV = 1000 (indicates the future/face value)
Rate = 5.6%/2 (indicates the rate of interest)
PV = ? (indicates the current bond price)
Current Bond Price = PV(Rate,Nper,PMT,FV) = PV(5.6%/2,12,30,1000) = 1020.15
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Whe Interest Rates Increase by .5%
Nper = 6*2 = 12 (indicates the period over which interest payments are made)
PMT = 1000*6%*1/2 = 30 (indicates the amount of interest payment)
FV = 1000 (indicates the future/face value)
Rate = (5.6% +.5%)/2 (indicates the rate of interest)
PV = ? (indicates the current bond price)
Current Bond Price = PV(Rate,Nper,PMT,FV) = PV(3.05%,12,30,1000) = 995.04
Answer is Price Decreased by = 1020.15 - 995.04 = $25.11
Thanks.
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