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A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000.__________ Fill in the blank, read surrounding text. % is the percentage change in the price of this bond if the yield to maturity rises to 6% from the current yield to maturity of 4.5%

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Baraq

Answer:

12.38% decrease

Explanation:

Given the following parameters

6%

Number of years = 12

Market yield I= 6 === 4.5

Present Value = 916.16 == 1045.59

PMT (annuity payment) = 50 (5%x1000)

Future value = 1000

Therefore, to solve for the percentage change, we have in the price of this bond in this situation, we have (916.16-1045.59) / 1045.59 = -0.1238

Hence, 12.38% decrease is the percentage change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%,

The percentage change in the price of this bond will be -12.38%.

The price of the bond at 4.5% is calculated thus:

  • Yield to maturity = 4.50%
  • Years left to maturity = 12
  • Annual coupon rate = 5%
  • Face value = $1000.
  • Annual coupon payment = $50
  • Price of the bond at 4.5% = $1045.59

The price of the bond at 6.0% is calculated thus:

  • Yield to maturity = 6.00%
  • Years left to maturity = 12
  • Annual coupon rate = 5%
  • Face value = $1000.
  • Annual coupon payment = $50
  • Price of the bond at 6.0% = $916.16

The percentage change in price will be:

= (916.16 - 1045.59) / 1045.59

= -12.38%

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