The yield of the 10-year US Treasury bond is 1.20%. It is the risk-free rate. You work for investment manager and your boss asks you to calculate the price of a 10-year corporate bond that yields 3.00% more than its risk-free rate and has a face value of $1,000. The fixed coupon of this corporate bond is 5.00%. Both bonds pay coupons annually. • What is the current price of the corporate bond? • Calculate the price of the bond if its yield increased by 1.00%. • Calculate the price of the bond if its yield decreased by 1.00%. • Please discuss the risk associated with this change in interest rates?

Bond price is the present value of all future cash flows, the 10 annual coupons and the face value of $1000 payable to bondholders at the end of year 10.

The bond price can determined using a financial calculator which requires that the calculator be set to its end mode because annual coupon payments would occur at the end of each year, before making necessary inputs into the calculator.

3.00% more than its risk-free rate:

N=10(number of annual coupons)

I/Y=4.20(1.20%+3.00%)

PMT=50(annual coupon=5.00%*$1000)

FV=1000

CPT(press compute)

PV=$1,064.25

1% increase in yield:

N=10(number of annual coupons)

I/Y=5.20(1.20%+3.00%+1.00%)

PMT=50(annual coupon=5.00%*$1000)

FV=1000

CPT(press compute)

PV=$984.71

1% decrease in yield:

N=10(number of annual coupons)

I/Y=3.20(1.20%+3.00%-1.00%)

PMT=50(annual coupon=5.00%*$1000)

FV=1000

CPT(press compute)

PV=$1,151.99

The risk associated with the changes in bond's interest rate is the interest rate risk, which means bond prices would rise when interest rates goes down and decrease when interest rate rises, in other words, a bond investor is exposed to interest rate risk, which would impact the actual yield earned on the bond investment overall.

Find out more about interest rate risk on:https://brainly.com/question/22400530

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