Final answer:
To calculate the price change of a bond when the market yield changes, you need to calculate the bond's duration and use it in the price change formula.
Step-by-step explanation:
When interest rates change, the price of a bond will also change. In this case, the market yield changed by 50 basis points, or 0.50%. To determine the price change, we need to calculate the bond's duration, which measures its sensitivity to changes in interest rates. The formula for duration is:
Duration = ((1/(1+r))^1 × (1/(1+r))^2 × ... × (1/(1+r))^n) × (1+r) × n × C / (1+r)^n × F
where:
- r is the yield/interest rate
- n is the number of coupon periods remaining
- C is the coupon payment per period
- F is the par value
Once we have the duration, we can calculate the percentage change in price using the formula:
Price Change = - Duration × Δr × (Price / (1+r))
where:
- Δr is the change in yield/interest rate in decimal form
By plugging in the values for the bond in question, we can calculate the price change.