It is 15 august 2008 and bond matures on 15 august 2018. - Coupon payments on 15

Question

It is 15 august 2008 and bond matures on 15 august 2018.

- Coupon payments on 15 February + 15 August each year

- Annual coupon rate is 4.000%

- Current yield = 1.2%

- 14 August you buy a note

- Ignore difference of one day to the coupon payment date and let the yield be the same as current.

a. What would you expect for price of the note, as a percentage of the face value?

b. Suppose the duration of the note in a. is 2,38 years. If relevant interest rates increase 25% (or 0,25), what is the change in the price of the note?

Explanation / Answer

a.

Annual coupon rate = 4% Face value = 1000 Current yield = 1.20% Annual coupon interest = Face value*Annual coupon rate = 1000*4% = 40 Current yiled = Annul coupon interest/Issue price 1.2% = 40/Issue price Issue price = 3,333 Face value = 1000 Issue price is the % of face value = 333%

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