A$1,000 bond with a coupon rate of 5.2 % paid semiannualy has nine years to maturity...

Question

Question

Answer 1

Answer #1

The present value of bond when coupon rate is 5.2 and YTM is 6.4% is ( compounded semi annually)

FV = $1000

PMT = 5.2%/2 * 1000

= $26

I/Y = 3.2%

So, the Present value of bond is = $918.8572

So, as the YTM decreases by 0.8%, so the new YTM is 5.6%,

The new present value of bond is $972.0220

So, the bond price rises by $53.1648

The correct option is option A. As the interest rate falls, the bond price rises as the interest rate and bond prices move inversely.

Answer 2

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