{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ch7VideoBondProblems

Ch7VideoBondProblems - Suppose the bond described above...

This preview shows page 1. Sign up to view the full content.

Ch. 7 Bond Problems from video You own a semi annual, 10 year, 8% coupon bond with a face value of \$1,000. The yield to maturity of the bond is 6.5%. Interest rates decline by ¾ of a percent. What is the percent price change in the bond after the change in interest rates? Price before the interest rate change: FV = 1000 PMT = 8% x 1000 = 80. Divide by 2 for semi annual payment of 40 N = 10 x 2 = 20 periods I = 6.5/2 = 3.25 Solve for PV = price = 1,109.045 Price after the interest rate change: FV = 1000 PMT = 8% x 1000 = 80. Divide by 2 for semi annual payment of 40 N = 10 x 2 = 20 periods I = 5.75/2 = 2.875 Solve for PV = price = 1,169.32 The price change is (1169.32-1109.045)/1109.045 = 0.054 or 5.4%
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Suppose the bond described above were a 2 year bond, with everything else the same. Now, what is the percent price change? Price before the interest rate change: FV = 1000 PMT = 8% x 1000 = 80. Divide by 2 for semi annual payment of 40 N = 2 x 2 = 4 periods I = 6.5/2 = 3.25 Solve for PV = price = 1027.71 Price after the interest rate change: FV = 1000 PMT = 8% x 1000 = 80. Divide by 2 for semi annual payment of 40 N = 2 x 2 = 4 periods I = 5.75/2 = 2.875 Solve for PV = price = 1,041.94 The price change is (1041.94-1027.71)/1027.71 = 0.0138 or 1.38% Note that the price goes up in both cases, but the price change is greater for the longer term bond....
View Full Document

{[ snackBarMessage ]}

What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern