37% B) DECREASED BY 2

6.25% to 6.5%? A) decreased by 2.37% B) decreased by 2.43% C) increased by 2.37% D) decreased by 2.50% E) increased by 2.43% Solution: A Initial bond price is the present value of all future cash flows discounted at the yield to maturity. Bond Price = PV of coupons + PV of the face value = $60 x PVIFA(6.25%, 15) + $1,000 / (1 + 0.0625)

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= $573.33 + $402.78 = $976.11 If the yield to maturity increases to the 6.5% then the new bond price= $60 x PVIFA(6.5%, 15) + $1,000 / (1 + 0.065)

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= $564.16 + $388.83 = $952.99 Based on the above the change in bond price = (Initial Bond Price – New Bond Price) / Initial Bond Price = ($976.11 - $952.99) / $976.11 or that the bond price declined by