8. The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstandin
ID: 2759290 • Letter: 8
Question
8.
The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7 percent?
A.
The bond price will increase by 1.14 percent.
B.
The bond price will increase by 2.29 percent.
C.
The bond price will decrease by 1.74 percent.
D.
The bond price will decrease by 1.92 percent.
E.
The bond price will decrease by 2.36 percent.
The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7 percent?
Explanation / Answer
Bond Par value 1,000 Semi Annual interest @3.25%= 32.50 Semi Annual YTM initial 2.75 % Semi Annual YTM increased 3.50 % Bond Price calculation YTM 5.5% YTM 7% Period Interest+Maturity PV factor @2.75% PV of Cash flows PV factor @3.5% PV of Cash flows 1 32.50 0.973 31.63 0.966 31.40 2 32.50 0.947 30.78 0.934 30.34 3 32.50 0.922 29.96 0.902 29.31 4 32.50 0.897 29.16 0.871 28.32 5 32.50 0.873 28.38 0.842 27.36 6 32.50 0.850 27.62 0.814 26.44 7 32.50 0.827 26.88 0.786 25.54 8 32.50 0.805 26.16 0.759 24.68 9 32.50 0.783 25.46 0.734 23.85 10 32.50 0.762 24.78 0.709 23.04 11 32.50 0.742 24.11 0.685 22.26 12 32.50 0.722 23.47 0.662 21.51 13 32.50 0.703 22.84 0.639 20.78 14 1,032.50 0.684 706.23 0.618 637.86 Total $ 1,057.46 $ 972.70 YTM 5.5% YTM 7% Change Change % Bond Price $ 1,057.46 $ 972.70 $ 84.76 8.02% As per calculation the bond price decreases by 8.02 % None of the option show the same.
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