What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 5%?
Assumed bond face value | $1,000.00 | |||||
Interest | 8% | |||||
Interest | $ 80.00 | |||||
Year | Cashflow | PV factor @ 8% | PV | |||
1 | $ 80.00 | 0.925926 | $ 74.07 | |||
2 | $ 80.00 | 0.857339 | $ 68.59 | |||
3 | $ 80.00 | 0.793832 | $ 63.51 | |||
3 | $1,000.00 | 0.793832 | $ 793.83 | |||
$ 1,000.00 | ||||||
Year | Cashflow | PV factor @ 5% | PV | |||
1 | $ 80.00 | 0.952381 | $ 76.19 | |||
2 | $ 80.00 | 0.907029 | $ 72.56 | |||
3 | $ 80.00 | 0.863838 | $ 69.11 | |||
3 | $1,000.00 | 0.863838 | $ 863.84 | |||
$ 1,081.70 | ||||||
As we can see that the bond price is increased from $ 1,000 to $ 1,081.70 | ||||||
What happens to the price of a three-year bond with an 8% coupon when interest rates...
What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 5%? A price increase of $71.54 A price decrease of $71.54 A price increase of $81.70 A price decrease of $81.70
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