A 16-year, 4.5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?
This problem is a bond problem, where the bond pays annual coupon payments. First you need to find the current price using the 5.5% market rate, then find the current price using the new 5.7% rate, and finally, compare the two prices and calculate the percentage change.
I have used a HP 10BII financial calculator; if you are using another financial calculator, you may need to adjust the inputs accordingly. You will find the current price of the bond using the following inputs into the ...
This solution shows with detailed calculations, what happens to bond prices when the market interest rate changes. The current prices of the bond have been calculated using a financial calculator. The solution also includes an explanation on how to calculate a percentage change in price.