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    Bond Price and Interest Rate

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    Consider two bonds A and B. The coupon rates are 10 percent and the face values are $1,000 for both bonds. Both bonds have annual coupons. Bond A has 20 years to maturity while bond B has 10 years of maturity.

    a. What are the prices of the two bonds if the relevant market interest rate for both bonds is 10 percent?
    b. If the market interest rate increases to 12 percent, what will be the prices of the two bond?
    c. If the market interest rate decreases to 8 percent, what will be the prices of the two bonds?

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    Solution Preview

    Consider two bonds A and B. The coupon rates are 10 percent and the face values are $1,000 for both bonds. Both bonds have annual coupons. Bond A has 20 years to maturity while bond B has 10 years of maturity.

    a. What are the prices of the two bonds if the relevant market interest rate for both bonds is 10 percent

    b. If the market interest rate increases to 12 percent, what will be the prices of the two bond

    c. If the market interest rate decreases to 8 percent, what will be the prices of the two bonds?

    To calculate the price of the bond we need to calculate / read from tables the values of
    PVIF= Present Value Interest Factor
    PVIFA= Present Value Interest Factor for an Annuity
    Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
    PVIF( n, r%)= =1/(1+r%)^n

    market interest rate = 10%

    Price of bond A
    Coupon rate= 10.000%
    Face value= $1,000
    Frequency= A Annual
    No of years to maturity= 20
    No of Periods= 20
    Discount rate annually= 10.00% annual
    Discount rate per period= 10.00%
    n= 20 periods
    r= 10.00% per period

    Interest payment per period= $100 Annual
    Redemption value= 1000

    PVIF ...

    Solution Summary

    Calculates bond price for different interest rates.

    $2.19

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