Question

If the current yield of a bond goes down from 6.5% to 4.5%, by what percent does the market price increase? Round your answer to the nearest percent.

Answer 1

The answer is market price icreases by 44%.

Working:

Let's assume bond value to $100. So the interest rate at 6.5% comes to $65. Now the yield falls to 4.5%. So earlier $65 was 6.5% and now $65 is 4.5% only. Hence revised bond price will be $65 / 4.5% which is $144. Price increase is $44 (144-100). In percentage terms bond price increase is 44/100 which is 44%.

Explanation:

Price of the bond changes inversely with interest rates works. When interest rates goes down, bond prices risesr so to have the effect of matching the interest rate on the bond with current rates.