question archive North South Company has bonds with 20 years to maturity, a face value of $1,000
North South Company has bonds with 20 years to maturity, a face value of $1,000
Subject:FinancePrice:2.86 Bought11
North South Company has bonds with 20 years to maturity, a face value of $1,000. coupon rate of 9 percent and YTM of 7 percent. The company makes semiannual payments. What is the percentage change in the price of this bond if the market yield suddenly decreases to 5 percent? a. 17.39 percent b. 10.22 percent c. 19.03 percent d. 13.92 percent e. 23.77 percent
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Issue Price of the Bond if the Yield to maturity of the Bond is 7.00%
· The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
· The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
· Here, the calculation of the Bond Price using financial calculator is as follows
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Variables |
Financial Calculator Keys |
Figures |
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Par Value/Face Value of the Bond ($1,000) |
FV |
1,000 |
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Coupon Amount ($1,000 x 9.00% x ½) |
PMT |
45 |
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Market Interest Rate or Yield to maturity on the Bond (7.00% x 1/2) |
1/Y |
3.50 |
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Maturity Period/Time to Maturity (20 Years x 2) |
N |
40 |
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Market Price of the Bond |
PV |
? |
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Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,213.55.
Issue Price of the Bond if the Yield to maturity of the Bond is decreases to 5.00%
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|
Variables |
Financial Calculator Keys |
Figures |
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|
|
|
|
Par Value/Face Value of the Bond ($1,000) |
FV |
1,000 |
|
Coupon Amount ($1,000 x 9.00% x ½) |
PMT |
45 |
|
Market Interest Rate or Yield to maturity on the Bond (5.00% x 1/2) |
1/Y |
2.50 |
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Maturity Period/Time to Maturity (20 Years x 2) |
N |
40 |
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Market Price of the Bond |
PV |
? |
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Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,502.06.
Percentage change in the price of the Bond
Percentage change in the price of the Bond = [($1,502.06 - $1,213.55) / $1,213.55] x 100
= [$88.51 / $1,213.55] x 100
= 23.77%
Therefore, the Percentage change in the price of the Bond will be (e)- 23.77 Percent
