Investment Planning | Lesson 6: Bond Valuation

Question 1

Calculate the new price of the following bond when interest rates change:
A 10-year bond was selling in the marketplace for $1,071. It pays investors $80 annually with a $1,000
maturity value. If interest rates in the marketplace fall 100 basis points, the new price of this bond will:
a) Fall $40.
b) Rise $68!
C) Fall $71.
d) Rise $74.

Answer 1

Answer: D

D = (1 + y)/y - [(1 + y) + t(c - y)]{c[(1 + y)^t - 1] +y}

1.07/0.07 - ((1.07) + 10(0.08 - 0.07))/(0.08[(1.07)^10 - 1] + 0.07)

= (15.2857 - 1.17/0.1474)

= 7.34

∆ P/P=-D[∆ y/1+y]

-7.34[-.01/1.07]

= 0686 = 6.86 % increase in price

$ 1, 071 x0.0686= 73.47

Question 2

A bond is paying a 12% coupon and is selling for $1,200. Which of the following accurately reflects (from
lowest to highest the yield relationship?
a) YTC - YTM - CY - CR.
b) CR - CY - YTM - YTC.
c) YTM-YTC-CY-CR.
d) CY - CR - YTC - YTM

Answer 2

Answer: A

This is a premium bond. For premium bonds, the yields from lowest to highest are: YTC - YTM - CY - CR.