Answer:
Percentage change in price = 1.54%
Explanation:
The price of a bond is the present value (PV) of its interest payments and redemption value.
Note that interest payment = Coupon (%) × Face value
<em>The coupon rate is 12% in this question</em>
The redemption value is the amount payable upon maturity of the bond. Here, it is the face value.
So we discount these cash flows- interest payments and face value
Price of the bond at a yield of 6%
Interest rate payment = 6% × 1000 = 60
PV of interest payments = (1 - (1+r)^(-n))/r
r = yield, n = number of years
PV of interest:
60 × (1 - (1+0.06)^(-12))/0.06
= 60 × 8.3838
=$530.30
PV of redemption value = 1000 × (1+0.06)^(-12)
= 496.96
Price of Bond = 530.30 + 496.96 = $1027.26
Price of bond when yield is 5.5%
= 60 × (1 - (1+0.055)^(-12))/0.055
= 60 × 8.6185
=$517.11
PV of redemption value = 1000 × (1+0.055)^(-12)
= 525.98
Price of Bond = 517.11+ 525,98 = $1043.09
Percentage change in price =
=( (1043.09-1027.26)/1027.26) × 100
= 1.54%
