A bond has a Macaulay duration of 10.5 years and a yield to maturity of 6.4 percent. If the bond is currently selling for $964, what is the new bond price if interest rates increase by 0.5 percent?

Question

Quizplus · Accepted Answer

First, we need to calculate the present value of the bond at its current yield to maturity:

PV = 964 = (C/1.064) + (C/1.064^2) + ... + (C/1.064^21) + (1000/1.064^21)

where C is the annual coupon payment. Solving for C, we get:

C = 1000 x 6.4% / [(1 - 1/1.064^21) / 0.064] = $68.465

Next, we need to calculate the new bond price using the new yield to maturity of 6.9%:

PV' = (C/1.069) + (C/1.069^2) + ... + (C/1.069^21) + (1000/1.069^21) = $914.96

Therefore, the new bond price is $914.96.

The correct answer is D.

A Bond Has a Macaulay Duration of 10