Assume a three-year bond with
Assume a three-year bond with an 8% annual coupon. If rateschange from 8% to 6% , what is the price change in the bond. Pleasegive me dollar value per $1,000 face and % of par.
Answer:
Price of the bond at interest rate of 8%:
Information provided:
Par value= future value=$1,000
Time= 3 years
Coupon rate= 8%
Coupon payment= 0.08*1,000=$80
Yield to maturity= 8%
The price of the bond is calculatedby computing the present value of the bond.
Enter the below in a financialcalculator to compute the present value:
FV= 1,000
PMT= 80
N= 3
I/Y=8
Press the CPT key and PV to computethe present value.
The value obtained is1,000.
Therefore, the price of thebond at interest rate of 6% is$1,000.
Price of the bond at interest rate of 6%:
Information provided:
Par value= future value=$1,000
Time= 3 years
Coupon rate= 8%
Coupon payment= 0.08*1,000=$80
Yield to maturity= 6%
The price of the bond is calculatedby computing the present value of the bond.
Enter the below in a financialcalculator to compute the present value:
FV= 1,000
PMT= 80
N= 3
I/Y=6
Press the CPT key and PV to computethe present value.
The value obtained is1,053.46.
Therefore, the price of thebond at interest rate of 6% is$1,053.46.
Price change in the bond:
= $1,053.46 – $1,000
=$53.46.
% of par:
= $53.46 / $1,000*100
= 0.0535*100
=5.35%.
In case of any query, kindlycomment on the solution.
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