Consider two bonds, a 3-year bond paying an annual coupon of 5.90% and a 10-year bond also with an annual coupon of 5.90%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 9%. a. What is the new price of the 3-year bonds

First bond new price = $921.53

Second bond new price = $801.05

Explanation:

a. Face value = future value = $1,000

Coupon rate = 5.90%

Coupon payment = 0.0590*1,000 = 59

Time = 3 years

Yield to maturity = 9%

Enter the below in a financial calculator to calculate the present value of the bond:

FV = 1,000

PMT = 59

N = 3

I/Y = 9

The value obtained is 921.53.

Therefore, the new price of the bond is $921.53.

b. Face value = future value = $1,000

Coupon rate = 5.90%

Coupon payment = 0.0590*1,000 = 59

Time = 10 years

Yield to maturity = 9%

Enter the below in a financial calculator to calculate the present value of the bond:

FV = 1,000

PMT = 59

N = 10

Interest rate per annum = 9

The value obtained is 801.05.

Therefore, the new price of the bond is $801.05.