Explore BrainMass
Share

Bond Price and Interest Rate

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

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?

© BrainMass Inc. brainmass.com October 24, 2018, 7:20 pm ad1c9bdddf
https://brainmass.com/business/interest-rates/64260

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
See Also This Related BrainMass Solution

Advance bond concepts

Problem:

5.Calculate the effective duration of a bond to a 100 basis point change in interest rates with a 6-1/4 coupon, 10-years remaining to maturity, and an asking quote of 110.7811 (decimal, not 32nds).

Calculate the effective convexity to a 100 basis point change of the bond in Question 5.

Calculate the total percentage price change (duration and convexity) to a 65 basis point decrease in interest rates for the bond in Questions 5 and 6.

View Full Posting Details