You own a 7 percent, semiannual coupon bond that matures in 8 years. The par value is $1,000 and the current yield to maturity is 7.6 percent. What will the percentage change in the price of your bond be if the yield to maturity suddenly increases by 75 basis points?

Question

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The correct answer is A.The percentage change in the price of a bond is given by the following formula:%ΔP = - (ΔYTM / (1 + YTM/2)^2n) * (P / C)where:%ΔP is the percentage change in the price of the bondΔYTM is the change in the yield to maturityYTM is the yield to maturityn is the number of years to maturityP is the par value of the bondC is the annual coupon paymentIn this case, we have:ΔYTM = 75 basis points = 0.75%YTM = 7.6%n = 8P = $1,000C = $70Plugging these values into the formula, we get:%ΔP = - (0.75% / (1 + 7.6%/2)^2*8) * (1000 / 70)%ΔP = -4.37%Therefore, the percentage change in the price of the bond will be -4.37%.

You Own a 7 Percent, Semiannual Coupon Bond That Matures