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8 December, 05:30

uppose you bought a 20-year, $1,000 face-value bond for par 5 years ago. The annual coupon rate on this bond is 8.5% and interest payments are paid annually. If returns required by bond holders are now 1.5% higher than they were 5 years ago, then how much of a decrease have you experienced in the price of your bond

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  1. 8 December, 06:47
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    Face Value=1000

    Remaining term=15years

    coupon rate=8.5% = YTM

    purchased 5 years ago

    Purchase price=1000

    Current required rate of return=8.5%+1.5%=10%

    Current price of bond = Coupon amount*PVIFA (RR, N) + Maturity value*PVIF (RR; N) = 1000*8.5%*PVIFA (10%; 15) + 1000*PVIF (10%; 15) = 85*7.6061+1000*0.2394=885.9185

    Decrease in the bond=1000-885.9185=114.0815
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