Question

Consider three bonds with 5.50% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years.

a. What will be the price of the 4-year bond if its yield increases to 6.50%?
b. What will be the price of the 8-year bond if its yield incrteases to 6.50%?

Answer 1

Answer:

a. $965.74

b. $939.11

Explanation:

In this question we use the Present value formula i.e shown in the attachment below:

1. Given that,  

Future value = $1,000

Rate of interest = 6.5%

NPER = 4 years

PMT = $1,000 × 5.5% = $55

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, after solving this, the price would be $965.74

2. Given that,  

Future value = $1,000

Rate of interest = 6.5%

NPER = 8 years

PMT = $1,000 × 5.5% = $55

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, after solving this, the price would be $939.11