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Determine the Fair Value of A Bond at Different Market Rates

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Assume that Bond A represents a 10% annual coupon bond with 10 years to maturity, a face value of $1000, and a yield of 10%. Bond B represents a 10% annual coupon bond with five years to maturity, a face value of $1000, and also has a yield of 10%. Now, assume the yield on both bonds rises to 11%. On a percentage basis, which bond has lost more value, and why is this the case? Be sure to identify the percentage change in the prices of both bonds.

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Solution Summary

This solution discusses the effect of changes in market interest rates on the fair value of a previously-issued bond. It illustrates the procedure to determine the value and loss using an Excel 97-2003 worksheet.

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The 10-year bond will lose more of its value than the 5-year bond because ...

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