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    Price of Bond

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    Lester purchases a 30-year Treasury bond today. This bond is selling at par ($1,000) and has a coupon rate and yield to maturity of 7% (the bond pays interest annually). Now suppose that next week, a number of economic events occur which raises the rate of inflation. As a result the market rate of interest rises from 7% to 8%. By how much does the price of your bond immediately decline to?

    Please show all computations. Thank you.

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    Solution Preview

    The price of a bond is the sum of the discounted cash flows. The cash flows from a bond are the interest and the principal repayment. The interest amount is paid every year and hence it is in the ...

    Solution Summary

    The solution explains how to calculate the change in the price of a bond given the change in market interest rates