Bonds Price Calculations
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1. What is the return on a 5 % coupon bond that initially sells for $1,000 and sells for $900 one year later?
2. The duration of a ten-year, 10% coupon bond when the interest rate is 10% is 6.76 years. What happens to the price of the bond if the interest rate falls to 8%?
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This solution is comprised of a detailed explanation to answer what is the return on a 5 % coupon bond that initially sells for $1,000 and sells for $900 one year later and what happens to the price of the bond if the interest rate falls to 8%.
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1. What is the return on a 5 % coupon bond that initially sells for $1,000 and sells for $900 one year later?
Assume no coupon receive before sell
Value of bond = INT(PVIFAr,n) + PAR(PVIFr,n) where INT is the coupon interest
r is the interest rate
n is the period left until maturity
900 = 0(PVIFAr, 1) + 1,000(PVIFr, 1)
900 = 1,000(PVIFr, 1)
r = 11%
We will find the NPV of the bond. We will ...
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