uppose you bought a 20-year, $1,000 face-value bond for par 5 years ago. The annual coupon rate on this bond is 8.5% and interest payments are paid annually. If returns required by bond holders are now 1.5% higher than they were 5 years ago, then how much of a decrease have you experienced in the price of your bond

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Nikolai Wright

13 November, 19:35

uppose you bought a 20-year, $1,000 face-value bond for par 5 years ago. The annual coupon rate on this bond is 8.5% and interest payments are paid annually. If returns required by bond holders are now 1.5% higher than they were 5 years ago, then how much of a decrease have you experienced in the price of your bond

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Freeway · Answer 1

Face Value=1000

Remaining term=15years

coupon rate=8.5% = YTM

purchased 5 years ago

Purchase price=1000

Current required rate of return=8.5%+1.5%=10%

Current price of bond = Coupon amount*PVIFA (RR, N) + Maturity value*PVIF (RR; N) = 1000*8.5%*PVIFA (10%; 15) + 1000*PVIF (10%; 15) = 85*7.6061+1000*0.2394=885.9185

Decrease in the bond=1000-885.9185=114.0815