Question

A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.)
Basic Input Data:
Years to maturity:		20
Periods per year:		2
Periods to maturity:		40
Coupon rate:		8%
Par value:		$1,000
Periodic payment:		$80
Current price		$1,100
Call price:		$1,040
Years till callable:		5
Periods till callable:		10

e. How would the price of the bond be affected by changing the going market interest rate? (Hint: Conduct a sensitivity analysis of price to changes in the going market interest rate for the bond. Assume that the bond will be called if and only if the going rate of interest falls below the coupon rate. That is an oversimplification, but assume it anyway for purposes of this problem 8% Nominal market rate, r: Value of bond if it's not called Value of bond if it's called The bond would not be called unless rscoupon We can use the two valuation formulas to find values under different r's, in a 2-output data table, and then use an IF statement to determine which value is appropriate Value of Bond If: Not called Called Actual value, considering $0.00call likehood: Rate, r$0.00 0% 2% 4% 6% 8% 10% 12% 14% 16%