Consider a 10.80 percent coupon bond with seven years to maturity and a current
ID: 2745146 • Letter: C
Question
Consider a 10.80 percent coupon bond with seven years to maturity and a current price of $979.20. Suppose the yield on the bond suddenly increases by 2 percent.
Use duration to estimate the new price of the bond. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Calculate the new bond price. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
1.
Use duration to estimate the new price of the bond. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
YTM = C + (F - P)/n / (F + P)/2
= 108 + (1000 - 979.20)/7 / (1000 + 979.20)/2 = 11.20%
1. The new price of the bond = c * PVIFA(YTM, N) + P * PVIF(YTM, N)
= 108 * PVIFA (11.20%, 7) + 1000 * PVIF (11.20%, 7)
= 108 * 4.6819 + 1000 * 0.4756 = $981.25
2. If the YTM increases to 2%, the new price of the bond = 108 * PVIFA (13.20%, 7) + 1000 * PVIF (13.20%, 7)
= 108 * 4.3452 + 1000 * 0.4198 = $889.08
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