Question

Consider a 5-year bond with a par value of $1,000 and an 9% annual coupon. If interest rates change from 9% to 5% the bond's price will: increase by $__.

Answer 1

Answer:

$173.18

Explanation:

First and foremost, we need to determine the prices for the bond at 9% and 5% yields respectively, using a financial calculator as shown below:

The financial calculator should be set to its end mode before making the following inputs:

9% yield:

N=5(number of annual coupons in 5 years)

PMT=90(annual coupon=face value*coupon rate=$1000*9%=$90)

I/Y=9(yield of 9% without the "%" sign)

FV=1000

CPT

PV=$1000.00

5% yield:

N=5(number of annual coupons in 5 years)

PMT=90(annual coupon=face value*coupon rate=$1000*9%=$90)

I/Y=5(yield of 5% without the "%" sign)

FV=1000

CPT

PV=$1,173.18

change in price=$1,173.18-$1,000.00

change in price=$173.18