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    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 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% ...

    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.

    $2.19

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