# Assignment1_answer - 5. Here we need to find the coupon...

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5. Here we need to find the coupon rate of the bond. All we need to do is to set up the bond pricing equation and solve for the coupon payment as follows: P = \$870 = C (PVIFA 6.8%,16 ) + \$1,000(PVIF 6.8%,16 ) Solving for the coupon payment, we get: C = \$54.42 The coupon payment is the coupon rate times par value. Using this relationship, we get: Coupon rate = \$54.42 / \$1,000 = 5.44% 17. Initially, at a YTM of 7 percent, the prices of the two bonds are: P J = \$25(PVIFA 3.5%,16 ) + \$1,000(PVIF 3.5%,16 ) = \$879.06 P K = \$55(PVIFA 3.5%,16 ) + \$1,000(PVIF 3.5%,16 ) = \$1,241.88 If the YTM rises from 7 percent to 9 percent: P J = \$25(PVIFA 4.5%,16 ) + \$1,000(PVIF 4.5%,16 ) = \$775.32 P K = \$55(PVIFA 4.5%,16 ) + \$1,000(PVIF 4.5%,16 ) = \$1,112.34 The percentage change in price is calculated as: Percentage change in price = (New price – Original price) / Original price Δ P J % = (\$775.32 – 879.06) / \$879.06 = – 11.80% Δ P K % = (\$1,112.34 – 1,241.88) / \$1,241.88 = – 10.43% If the YTM declines from 7 percent to 5 percent:

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## This note was uploaded on 07/16/2011 for the course 11 7 taught by Professor Drbrouce during the Spring '11 term at Arizona Western College.

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Assignment1_answer - 5. Here we need to find the coupon...

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