(Q. 18 IN B) WHAT HAPPENS TO THE PRICE OF A THREE-YEAR BOND WITH A...
13. (Q. 18 in B) What happens to the price of a three-year bond with an 8
percent coupon rate, semi-annual coupons, when interest rates change from 7
percent to 6 percent? The bond has a par value of $1,000.
A) A price decrease of $27.03
B) A price decrease of $27.53
C) A price increase of $27.03
D) A price increase of $27.53
Answer D
At the 7% interest rate, the bond price is:
1
[
1
]
$
,
000
×
40
.
64
)
$
026
$
6
+
6
=
−
×
0
035
)
(
At the 6% interest rate, the bond price becomes:
17
054
03
So the bond price increases by $1,054.17 - $1,026.64 = $27.53.