The initial bond price at yield of 4.20% is $1,064.25
The bond price at yield of 5.20% is $984.71
The bond price at the yield of 3.20% is $1,151.99
What is a bond price?
Bond price is the present value of all future cash flows, the 10 annual coupons and the face value of $1000 payable to bondholders at the end of year 10.
The bond price can determined using a financial calculator which requires that the calculator be set to its end mode because annual coupon payments would occur at the end of each year, before making necessary inputs into the calculator.
3.00% more than its risk-free rate:
N=10(number of annual coupons)
I/Y=4.20(1.20%+3.00%)
PMT=50(annual coupon=5.00%*$1000)
FV=1000
CPT(press compute)
PV=$1,064.25
1% increase in yield:
N=10(number of annual coupons)
I/Y=5.20(1.20%+3.00%+1.00%)
PMT=50(annual coupon=5.00%*$1000)
FV=1000
CPT(press compute)
PV=$984.71
1% decrease in yield:
N=10(number of annual coupons)
I/Y=3.20(1.20%+3.00%-1.00%)
PMT=50(annual coupon=5.00%*$1000)
FV=1000
CPT(press compute)
PV=$1,151.99
The risk associated with the changes in bond's interest rate is the interest rate risk, which means bond prices would rise when interest rates goes down and decrease when interest rate rises, in other words, a bond investor is exposed to interest rate risk, which would impact the actual yield earned on the bond investment overall.
Find out more about interest rate risk on:brainly.com/question/22400530
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