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OverLord2011 [107]
3 years ago
5

6. Assuming that the current interest rate is 3 percent, compute the present value of a five-year, 5 percent coupon bond with a

face value of $1,000. What happens when the interest rate goes to 4 percent
Business
1 answer:
Lostsunrise [7]3 years ago
6 0

Answer:

Part (a) $1,091.60

Part (b) $1,044.52

Explanation:

<u>Part (a)</u>

Face Value = FV = $1,000

N = 5 Years

r = YTM = 3%

Coupon Rate = 5%

C = Coupon Payment = 5% x $1,000 = $50

PV = ?? We have to calculate the Present Value

PV = C [\frac{1-\frac{1}{(1+r)^{N} } }{r}] + \frac{FV}{(1+r)^{N} }

PV = 50 [\frac{1-\frac{1}{(1+0.03)^{5} } }{0.03}] + \frac{1000}{(1+0.03)^{5} } = $1,091.60

<u>Part (b)</u>

Now the interest rate changes to 4%

r = 4%

PV = C [\frac{1-\frac{1}{(1+r)^{N} } }{r}] + \frac{FV}{(1+r)^{N} }

PV = 50 [\frac{1-\frac{1}{(1+0.04)^{5} } }{0.04}] + \frac{1000}{(1+0.04)^{5} } = $1,044.52

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