Answer:
(b) + 4.89%
Explanation:
Price of bond is the present value of future cash flows. The coupon payment and cash flow at maturity is discounted to calculate the value of the bond.
Assuming the face value of the bond is $1,000
As per given data
Coupon payment = $1,000 x 8.4% = $84 annually = $42 semiannually
Number of periods = n = 19 years x 2 = 38 periods
Yield to maturity = 7.2% annually = 3.6% semiannually
To calculate Price of the bond use following formula
Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]
Price of the Bond =$42 x [ ( 1 - ( 1 + 3.6% )^-38 ) / 3.6% ] + [ $1,000 / ( 1 + 3.6% )^38 ]
Price of the Bond = $42 x [ ( 1 - ( 1.036 )^-38 ) / 0.036 ] + [ $1,000 / ( 1.036 )^38 ]
Price of the Bond = $862.38 + $260.81
Price of the Bond = $1,123.19
There is an increase in selling price
Change in price = $1,123.19 - $1,070.85 = 52.34
Percentage change = 52.34 / $1,070.85 = 4.89%
