Question

You have a four-year bond with a coupon rate CR = 2% and a face value of $1,000. The bond makes annual coupon payments and its yield to maturity is 19% p.a. If the bond's yield to maturity decreases by 1% (i.e., by 100 basis points), find the resulting percentage change in the bond's price.

Answer 1

New yield=19%-1%=18%

Percentage change in bond's price=(1000*2%/18%*(1-1/1.18^4)+1000/1.18^4)/(1000*2%/19%*(1-1/1.19^4)+1000/1.19^4)-1=3.29132%