A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest.The duration of this bond is 4.99 years.What will be the new price using the duration model if interest rates increase to 8.5 percent?

Question

Quizplus · Accepted Answer

The new price of the bond can be calculated using the duration model formula: New Price = Old Price - (Duration * Change in Interest Rate * Old Price). Here, the old price is $1,000, the duration is 4.99 years, and the change in interest rate is 0.5% or 0.005 in decimal form. So, the calculation is $1,000 - (4.99 * 0.005 * $1,000) = $1,000 - $24.95 = $975.05. However, since none of the provided options exactly match this calculation, the closest correct option based on the given choices is B) $976.90.

A $1,000 Six-Year Eurobond Has an 8 Percent Coupon, Is