A $1,000 par value bond with Seven years left to maturity pays an interest payment semiannually with an 8 percent coupon rate and is priced to have a 7.5 percent yield to maturity. If interest rates surprisingly increase by 0.5 percent, by how much would the bond’s price change?
Bonds Price (increase/decrease) by ___________________
Value of bond today = Present value of all future cash flows
= 1,000*8%*1/2*PVAF(3.75%, 14 periods) + 1,000*PVF(3.75%, 14 periods)
= 40*10.7396 + 1,000*0.5973
= $1,026.88
When interest rate rise to 8%, the bond will trade at par as coupon rate = market rate
Hence, bond price will DECREASE by $26.88
A $1,000 par value bond with Seven years left to maturity pays an interest payment semiannually...
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