a. What is the cash flow of a 6% coupon bond that pays interest annually, mature

Question

a. What is the cash flow of a 6% coupon bond that pays interest annually, matures in seven years, and has a principal of $1,000?

b.Assuming a discount rate of 8%, what is the price of this bond?

c Assuming a discount rate of 8.5%, what is the price of this bond?

d,Assuming a discount rate of 7.5%, what is the price of this bond?

e. What is the duration of this bond, assuming that the price is the one you calculated in part (b)? (this is the problem I am having trouble with)

f. If the yield changes by 100 basis points, from 8% to 7%, by how much would you approximate the percentage price change to be using your estimate of duration in part (e)?

g. What is the actual percentage price change if the yield changes by 100 basis points?

Explanation / Answer

a. The cash flow of the bond will be the coupon interest yearly which is 6% of 1000 = $60. Hence the annual cash flow is $60

b. Price of the bond when discount rate = 8%. The price of the bond is given by PV formula in excel as in =pv
(rate,nper,pmt,fv) where rate =0.08, nper =7,pmt =60 and fv =1000. The price = pv(0.08,7,60,1000) = $895.87

c.Price of the bond when discount rate = 8.5%. The price of the bond is given by PV formula in excel as in =pv
(rate,nper,pmt,fv) where rate =0.085, nper =7,pmt =60 and fv =1000. The price = pv(0.085,7,60,1000) = $872.04

d.Price of the bond when discount rate = 7.5%. The price of the bond is given by PV formula in excel as in =pv
(rate,nper,pmt,fv) where rate =0.075, nper =7,pmt =60 and fv =1000. The price = pv(0.075,7,60,1000) = $920.55

Note: We have answered 4 sub -parts of the question. Kindly repost remaining for experts to answer

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