Jackson Central has a 6-year, 8% annual coupon bond with a $1,000 par value. Earls Enterprises has a 12-year, 8% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to
Maturity of 6%. Which of the following statements are correct if the market yield increases to 7%?

Question

Quizplus · Accepted Answer

To find the new price of the Jackson Central bond, we can use the formula:
P = (Coupon Payment / (1 + Market Yield)^Time) + (Coupon Payment / (1 + Market Yield)^(Time - 1)) + ... + (Coupon Payment + Face Value / (1 + Market Yield)^Time)
P = (80 / 1.07) + (80 / 1.07^2) + (80 / 1.07^3) + (80 / 1.07^4) + (80 / 1.07^5) + (80 / 1.07^6) + (1080 / 1.07^6)
P = $1,027.06

To find the new price of the Earls Enterprises bond, we can use the same formula:
P = (80 / 1.07) + (80 / 1.07^2) + ... + (80 / 1.07^11) + (1080 / 1.07^11)
P = $1,052.44

The percentage change in price for the Earls bond is:
(1052.44 - 1000) / 1000 = 5.24%
Therefore, the correct choice is D, as the Earls bond will decrease in value by 7.56% (not increase) if the market yield increases to 7%.

Jackson Central Has a 6-Year, 8% Annual Coupon Bond with a $1,000