Question

Assume you buy a bond with the following features Bond maturity = 6 Coupon Rate = 5.00% Face Value = $1,000 Annual Coupons When you buy the bond the market interest rate = 5.00% Immediately after you buy the bond the interest rate changes to 5.50% What is the "price risk" effect in year 4 ? Group of answer choices a) -$9.23 b) -$8.95 c) -$9.51 d) $9.51 e) $8.95 f) $9.23

Answer 1

when we purchased the bond the coupon rate was equal to the market yield rate. After we purchased the bond the market yield rate increased to 5.50%. So our bond will be categorized into a discount bond when the coupon is less than the market.

Particulars	Amount
Interest Rate	5.50%
Coupon Payment	-50
No of installments	2
Future Value/Maturity Value	-1,000.00
Present Value	990.768

We have taken the coupon payments and the maturity value of the bond as negative for calculation purpose. The value of the bond at the end of 4 years is 990.768. As we have to find the value of the bond after completion of 4 years, we have taken only 2 years for calculation purposes.

So at the end of 4 years we are at loss of $9.23 (990.77-1000) of price risk.