A $1,000 bond with a coupon rate of 5.6% paid semiannually has four years to maturity...

Question

Question

A $1,000 bond with a coupon rate of 5.6% paid semiannually has four years to maturity and a yield to maturity of 6.7%. If int

Answer 1

Answer #1

Answer: Option A is correct.

Face value=$1000
Coupon rate=5.6%
Semiannual coupon rate=5.6%/2=0.028
Semiannual coupon payment=(Semiannual coupon rate)*(face value)=0.028*1000=28

Time period=4 years
When the interest is paid semiannually, the number of periods=4*2=8 years
Similarly, semiannual yield to maturity=6.7%/2=0.0335

We can now calculate the price using excel.

1 Face value 1000 2 Coupon payment 28 Number of periods 3 Yield to maturity 4 0.0335 5 Present value ($961.96) 6 Formula used

So, the value of the bond when yield to maturity is 0.0335 is equal to $961.96

If yield to maturity decreases by 0.8%, new yield to maturity value=6.7%-.8%=0.059
Semiannual yield to maturity=0.059/2=0.0295

H 1 Face value 1000 2 Coupon payment 28 3 Number of periods 4 Yield to maturity 5 Present value= 0.0295 ($989.45) 6 Formula u

So, the value of the bond when yield to maturity is 0.0295 is equal to $989.45

Therefore, the value has increased by 989.45-961.96=27.49

Answer 2

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