Question

A bond with a 7-year duration is worth $1,079, and its yield to maturity is 7.9%. If the yield to maturity falls to 7.75%, you would predict that the new value of the bond will be approximately:_____________.

Answer 1

$1,087.27

Step-by-step explanation:

The new value of the bond is the new price of the bond calculated using yield to maturity of 7.75% instead of the original yield of 7.9% using excel pv formula provided thus:

=-pv(rate,nper,pmt,fv)

Before that we need to determine the pmt which is the annual coupon on the bond.

=pmt(rate,nper,-pv,fv)

rate is the original yield ot 7.9%

nper is the duration of 7 years

pv is the initial market price of $1,079

fv is the face value of $1000

=pmt(7.9%,7,-1079,1000)=$ 94.12

The new price is computed thus:

=-pv(7.75%,7,94.12,1000)=$1,087.27