Question

Assume you buy a bond with the following features

Bond maturity = 4
Coupon Rate = 6.00%
Face Value = $1,000
Annual Coupons
When you buy the bond the market interest rate = 4.00%

Immediately after you buy the bond the interst rate changes to 3.00%

What is the "price risk" effect in year 3 ?

-$10.19
$9.60
-$9.90
$9.90
$10.19
-$9.60

Answer 1

$9.90

Step-by-step explanation:

Price risk effect in year 3 = 1000*6%/3%*(1 - 1/1.03^1) + 1000/1.03 - 1000*6%/4%*(1 - 1/1.04^1) - 1000/1.04

= $9.90

Therefore, The "price risk" effect in year 3 is $9.90