You have bought a bond which carries a coupon rate of 8 percent, has 7 years until maturity, and sells at a yield to maturity of 7 percent.
Show your calculations and answer the following questions
What coupons do bondholders receive each year?
What is the price that you paid for this bond? (Assume annual coupon payments)
What will happen to the bond price if the yield to maturity rises to 9 percent? (give
theoretical and calculation answers)
The coupon received by bondholders is equal to parvalue of bond multiply by coupon rate
Coupon payment = $1000 * 8% = $80 [ Assumed par value =$1000]
Price of the bond is equal to the present value of the future cash flows discounted @ ytm
Price = $80 * PVAF [ 7%,7] + $1000 * PVAF [7%, 7]
= $80 * 5.3893 + 1000 * .6227 [As per annuity table]
= $1053.84
If the YTM rises the bond price will fall as it will be discounted at higher rate
Price = $80 * PVAF [ 9%,7] + $1000 * PVAF [9%, 7]
= $80 * 5.0330 + 1000 * .5470 [As per annuity table]
= $949.64
You have bought a bond which carries a coupon rate of 8 percent, has 7 years...
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