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19 July, 17:22

n investor purchased the following five bonds. Each bond had a par value of $1,000 and a 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%. What is the percentage change in price for each bond after the decline in interest rates

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  1. 19 July, 21:10
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    14.29%

    Explanation:

    An investor purchased the following five bonds.

    Each bond had a par value of $1,000 and a 8% yield to maturity on the purchase day.

    Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%.

    What is the percentage change in price for each bond after the decline in interest rates

    Generally, the relationship can be expressed as interest rate = Coupon Payment / Face Value.

    At purchase coupon rate = $80/$1000 = 8%

    Thereafter coupon rate = $80/Revised bond price = 7%

    Solving as : Revised bond price x 0.07 = $80

    Revised bond price = $80 / 0.07 = $1,142.85

    Therefore % change in bond price = [ ($1,142.85 - $1000) / $1000] x 100 = 14.29%
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Home » Business » n investor purchased the following five bonds. Each bond had a par value of $1,000 and a 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7%.
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