A $1,000 face value coupon bond will pay 5 percent interest annually for 12 years.What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent?

Question

Quizplus · Accepted Answer

To calculate the percentage change in price, we can use the following formula:

Percentage change in price = -duration x change in yield

First, we need to calculate the duration of the bond. Using the formula:

Duration = (1/Current Yield) x [1 - (1/(1 + Current Yield)^n)]

where n = number of periods and we can use 12 for this problem.

Duration = (1/0.055) x [1 - (1/1.055^12)] = 8.61

Next, we can calculate the change in yield:

Change in yield = New Yield - Current Yield = 0.06 - 0.055 = 0.005

Plugging in these values, we get:

Percentage change in price = -8.61 x 0.005 = -0.043 or -4.26%

Therefore, the best choice is B with this explanation.

A $1,000 Face Value Coupon Bond Will Pay 5 Percent