A government bond has a 7% coupon rate and a face value of $100. These bonds mak

Question

A government bond has a 7% coupon rate and a face value of $100. These bonds make annual interest payments, and have 10 years left to maturity. a) If investors require a yield to maturity of 9% per annum, what is the current bond price? Show your workings. b) If investors become concerned with the risk that the government may default on repayment of the bond and increase their required yield to maturity to 11% per annum, will this cause the bond price to increase or decrease? Explain your answer. (

Explanation / Answer

All Amounts in $ a) Face Value of Bond 100 Coupon Rate 7% Interest Payments Annual Years to Maturity 10 Yield to Maturity 9% C = coupon payment n = number of payments i = interest rate, or required yield M = value at maturity, or par value Based on the information, the bond price works out to $ 87.165 or $ 87.17. b) If the yield to maturity increases to 11% per annum, the price of the bond will proportionately reduce Thus, the new bond price will be $ 76.443 or $ 76.44.

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