A 12-year,5% coupon bond pays interest annually.The bond has a face value of $1,000.What is the change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

Question

Quizplus · Accepted Answer

To calculate the change in the price of the bond, we can use the formula:
Bond Price = (Coupon Payment / Market Yield) x [1 - 1/(1 + Market Yield)^n] + Face Value / (1 + Market Yield)^n

Where:
- Coupon Payment = $50 (5% of $1,000)
- Market Yield = 4.5%
- n = 12 (since the bond has a 12-year maturity)

Using this formula, we can calculate that the current price of the bond is $1,059.06.

To calculate the new price of the bond when the market yield rises to 6%, we can use the same formula, but with a new market yield of 6%:
Bond Price = ($50 / 6%) x [1 - 1/(1 + 6%)^12] + $1,000 / (1 + 6%)^12
Bond Price = $943.47

Therefore, the change in the price of the bond is:
($943.47 - $1,059.06) / $1,059.06 = -12.38%

So the best choice is B, which is a 12.38% decrease in the bond price.

A 12-Year,5% Coupon Bond Pays Interest Annually