Calculate the price of a bond given various interest rates.
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A bond has a face value of $100, a coupon rate of 8% and 5 years to redemption at par. The annual interest payment has just been made.
(a) What is the price of the bond if market interest rates are;
(i) 6%
(ii) 7%
(iii) 8%
(iv) 10%
(b) What is the duration of the bond if market interest rates are 7%?
(c) What will be the change in value of the bond for a 1% change in market interest rates?
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Solution Summary
This solution shows the calculation of the current price of the bond, assuming several different market interest rates, using a financial calculator. The solution also shows how to calculate the duration of the bond, using the duration formula and explaining how to solve the duration using Excel functions.
Solution Preview
Price of bond given various interest rates has been calculated using a HP 10BII financial calculator as follows:
(ai) Market interest rate = 6%
N = 5 (years to maturity)
FV = 100 (face value in pounds)
PMT = 8 (interest payment in pound, 8% coupon rate of face value)
I/Y = 6 (in percent, market interest rate)
Compute current price PV = 108.42 (in pounds)
(aii) Market interest rate = 7%
N = 5 (years to maturity)
FV = 100 (face value in pounds)
PMT = 8 (interest payment in pound, 8% coupon rate of face value)
I/Y = 7 (in percent, market interest rate)
Compute current price PV = 104.10 (in pounds)
(aiii) Market interest rate = 8%
N = 5 (years to maturity)
FV = 100 (face value in pounds)
PMT = 8 (interest payment in pound, 8% ...
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