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Ch7VideoBondProblems

Ch7VideoBondProblems - Suppose the bond described above...

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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%
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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....
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