Question

Question 2: You are required to produce a table showing bond values and the impact of changes in interest rate over the life of a bond and a diagram demonstrating the link between the changes in values(due to changes in interest rate) and time to maturity.

The bond has a face value of $1,000, pays a coupon rate of 7% p.a paid annually and it is issued with 10 years to maturity. All calculations should be executed in excel. Your table should show the following:

The value of the bond, year by year(from date of issue until its maturity), assuming all other things remain the same.

The value of the bond, year by year, from date of issue until its maturity, assuming that market interest rate increases by 1.5%(hence yield to maturity increases by 1.5%), all other things remain the same.

The potential%change in value, year by year, from the date of issue until its maturity.The % change in value demonstrates the impact of the increase in interest rate on the bond value (or interest rate risk), for each year of maturity.

From your table produce a diagram that demonstrates the relationship between % change in value and time to maturity. The initial market interest rate (yield to maturity) to be used is 7%

Answer 1

Constant Time to maturity Increasing interest rates Time to maturity % change in value Interest rates 7.00% $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Onwua 00 Interest rates Price 7.00% $1,000.00 8.50% $908.21 10.00% $839.95 11.50% $791.33 13.00% $760.15 14.50% $745.58 16.00% $748.16 17.50% $769.86 19.00% $814.42 20.50% $887.97 22.00% $1,000.00 -9.18% -7.52% -5.79% -3.94% -1.92% 0.35% 2.90% 5.79% 9.03% 12.62% % change in value % change in value -0 0 12 10 8 4 2