Question

Consider two bonds, a 3-year bond paying an annual coupon of 5.90% and a 10-year bond also with an annual coupon of 5.90%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 9%. a. What is the new price of the 3-year bonds

Answer 1

Answer:

First bond new price=  $921.53

Second bond new price =$801.05

Explanation:

a.  Face value= future value= $1,000

Coupon rate= 5.90%

Coupon payment= 0.0590*1,000= 59

Time= 3 years

Yield to maturity= 9%

Enter the below in a financial calculator to calculate the present value of the bond:

FV= 1,000

PMT= 59

N= 3

I/Y= 9

The value obtained is 921.53.  

Therefore, the new price of the bond is $921.53.

b. Face value= future value= $1,000

Coupon rate= 5.90%

Coupon payment= 0.0590*1,000= 59

Time= 10 years

Yield to maturity= 9%

Enter the below in a financial calculator to calculate the present value of the bond:

FV= 1,000

PMT= 59

N= 10

Interest rate per annum= 9

The value obtained is 801.05.

Therefore, the new price of the bond is $801.05.