17-63 An open-end bond mutual fund is holding a three-year,$1 million par value 5 percent annual coupon bond.What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?

Question

Quizplus · Accepted Answer

A 1 percent decrease in interest rates leads to an increase in bond prices. Using the bond pricing formula, the bond price would be $1,087,667. Therefore, the increase in the total value of the bond in the mutual fund is $87,667. However, since the bond is only a part of the mutual fund's portfolio, we cannot directly calculate the impact on the total asset value of the fund. We need to know the proportion of the bond in the portfolio and the number of mutual fund shares outstanding. As this information is not given in the question, we can only choose the option that provides a possible increase in the total asset value of the fund, which is D.

17-63 an Open-End Bond Mutual Fund Is Holding a Three-Year,$1