Question

A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent? Select one:______
a. 1.79 percent
b. −1.79 percent
c. −1.38 percent
d. −1.64 percent

Answer 1

Answer:

b. −1.79 percent

Explanation:

You can solve this using a financial calculator. I'm using TI BA II plus ;

First, find Price of the bond if YTM = 5.5%. Since it is semi-annual, adjust the YTM  and total duration;

N = 13*2 = 26

I/Y = 5.5%/2 = 2.75%

PMT = (6%/2)*1000 = 30

FV = 1,000

CPT PV = $1046.01

Next, find Price of the bond if YTM = 5.7%.

N = 13*2 = 26

I/Y = 5.7%/2 = 2.85%

PMT = (6%/2)*1000 = 30

FV = 1,000

CPT PV = $1027.28

Percentage change =[ (New price- Old price)/Old price] *100

$=\frac{1027.28-1046.01}{1046.01} *100\\ \\ = -0.017906 *100$

= -1.79%