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30 September, 02:16

Consider two bonds, a 3-year bond paying an annual coupon of 5.90% and a 10-year bond also with an annual coupon of 5.90%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 9%. a. What is the new price of the 3-year bonds

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  1. 30 September, 02:20
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    First bond new price = $921.53

    Second bond new price = $801.05

    Explanation:

    a. Face value = future value = $1,000

    Coupon rate = 5.90%

    Coupon payment = 0.0590*1,000 = 59

    Time = 3 years

    Yield to maturity = 9%

    Enter the below in a financial calculator to calculate the present value of the bond:

    FV = 1,000

    PMT = 59

    N = 3

    I/Y = 9

    The value obtained is 921.53.

    Therefore, the new price of the bond is $921.53.

    b. Face value = future value = $1,000

    Coupon rate = 5.90%

    Coupon payment = 0.0590*1,000 = 59

    Time = 10 years

    Yield to maturity = 9%

    Enter the below in a financial calculator to calculate the present value of the bond:

    FV = 1,000

    PMT = 59

    N = 10

    Interest rate per annum = 9

    The value obtained is 801.05.

    Therefore, the new price of the bond is $801.05.
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