A 15-year,4 percent coupon bond with a face value of $1,000 pays interest semiannually.Assume the bond currently sells at par.What will the percentage change in the price of this bond be if market rates increase by 10 percent?

Question

Quizplus · Accepted Answer

Since the bond is selling at par:Current market rate = Coupon rate = 4%New interest rate = 1.1 × 4% = 4.4%Bond value = [(.04 × $1,000)/2] × ({1 - 1/[1 + (.044/2)]^{15 × 2}}/(.044/2))+ {$1,000/[1 + (.044/2)]^{15 × 2}} = $956.41 Percentage change in price = ($956.41 - $1,000)/$1,000 = -1.96%

A 15-Year,4 Percent Coupon Bond with a Face Value of $1,000