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Consider two bonds, a 3-year bond paying an annual coupon of 5% and a 10-year bond also with an annual coupon of 5%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 10%. a. What is the new price of the 3-year bonds

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Shahzaibfaraz

Answer:

Bond Price = $875.6574005 rounded off to $875.66

Explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is an annual bond, the coupon payment, number of periods and annual YTM will be,

Coupon Payment (C) = 1,000 * 0.05  = $50

Total periods (n) = 3

r or YTM = 0.10

The formula to calculate the price of the bonds today is attached.

Bond Price = 50 * [( 1 - (1+0.10)^-3) / 0.10]  + 1000 / (1+0.10)^3

Bond Price = $875.6574005 rounded off to $875.66

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