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AveGali [126]
3 years ago
10

A $1,000 six-year bond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest. The durati

on of this bond is 4.99 years. What will be the new price if interest rates increase to 8.5 percent
Business
1 answer:
Dovator [93]3 years ago
3 0

Answer:

$976.90 will be the new price if interest rates increase to 8.5 percent.

Explanation:

YTM = 8%

Change in interest rate = (8.5% - 8%) = 0.5%  <em>(Increase of 0.5% )</em>

%Change In Price of Bond = -Duration/(1+YTM) X Change in Rate

                                            = -4.99/(1+0.08) X 0.5%

                                            = -2.310%

There will be a decrease of 2.310% in Bond Price

New Bond Price = 1000 - (1000 X 2.310%)

                           = 1000 - 23.10

                           = $976.90

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