Question

n investor purchased the following five bonds. Each bond had a par value of $1,000 and a 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%. What is the percentage change in price for each bond after the decline in interest rates

Answer 1

Answer:

14.29%

Explanation:

An investor purchased the following five bonds.

Each bond had a par value of $1,000 and a 8% yield to maturity on the purchase day.

Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%.

What is the percentage change in price for each bond after the decline in interest rates

Generally, the relationship can be expressed as interest rate = Coupon Payment / Face Value.

At purchase coupon rate = $80/$1000 = 8%

Thereafter coupon rate = $80/Revised bond price = 7%

Solving as : Revised bond price x 0.07=  $80

Revised bond price = $80 / 0.07 = $1,142.85

Therefore % change in bond price = [($1,142.85 - $1000) / $1000] x 100 = 14.29%