19) The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstandi

Question

19) The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7.25 percent? 19) A) The bond price will decrease by 9.27 percent. B) The bond price will increase by 3.86 percent. C) The bond price will decrease by 8.64 percent. D) The bond price will increase by 7.16 percent. E) The bond price will increase by 7.04 percent

Explanation / Answer

Correct option is > A) The bond price will decrease by 9.27%

Using financial calculator BA II Plus - Input details:

YTM 5.5%

I/Y = Rate or yield / frequency of coupon in a year =

              2.750000

PMT = Coupon rate x FV / frequency =

-$32.50

N = Number of years remaining x frequency =

14

FV = Future Value =

-$1,000.00

CPT > PV = Present value of bond =

$1,057.46

Using financial calculator BA II Plus - Input details:

YTM 7.25%

I/Y = Rate or yield / frequency of coupon in a year =

              3.625000

PMT = Coupon rate x FV / frequency =

-$32.50

N = Number of years remaining x frequency =

14

FV = Future Value =

-$1,000.00

CPT > PV = Present value of bond =

$959.39

Change in price in % = (Bond price at YTM 7.25% - Bond price at YTM 5.5%)/ Bond price at YTM 5.5%

Change in price in % = ($959.39 - $1,057.46)/ $1,057.46

= -9.27%

Using financial calculator BA II Plus - Input details:

YTM 5.5%

I/Y = Rate or yield / frequency of coupon in a year =

              2.750000

PMT = Coupon rate x FV / frequency =

-$32.50

N = Number of years remaining x frequency =

14

FV = Future Value =

-$1,000.00

CPT > PV = Present value of bond =

$1,057.46

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