A $1000 bond with a coupon rate of 5.4% paid semiannually has five years to maturity and a yield to maturity of 7.5%.If interest rates rise and the yield to maturity increases to 7.8%,what will happen to the price of the bond?

Question

Quizplus · Accepted Answer

When interest rates rise, the price of existing bonds decreases. This is because new bonds will offer a higher yield to maturity, making existing bonds less attractive. Using the bond pricing formula, the price of the bond with a yield to maturity of 7.5% is $983.44. When the yield to maturity increases to 7.8%, the price of the bond falls to $971.85. The difference between the two prices is $11.59, so the answer is B.

A $1000 Bond with a Coupon Rate of 5