Question

A $1,000 face value coupon bond will pay 5 percent interest annually for 12 years. What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent

Answer 1

-4.26%

Step-by-step explanation:

The computation of the percentage change in the price of the bond is shown below:

When the rate of interest is 6%, so the present value is

Given that

FV = $1,000

PMT = $50

NPER = 12

RATE = 6%

The formula is shown below;

=-PV(RATE,NPER,PMT,FV,TYPE)

After applying the above formula, the present value is $916.16

Now When the rate of interest is 5.5%, so the present value is

Given that

FV = $1,000

PMT = $60

NPER = 12

RATE = 5.5%

The formula is shown below;

=-PV(RATE,NPER,PMT,FV,TYPE)

After applying the above formula, the present value is $956.61

So, the percentage change in the price is

= ($916.16 - $956.61) ÷ $956.61

= -4.26%