Problem #5: A 10-year bond has face value (redemption value) $500,000 and quarterly coupons of 1%. Consider the time right after the 12th coupon has been paid, when the yield is 2.5%. (a) What is the price of the bond? (b) Compute the price of the bond if the yield were to increase by 1 basis point (a basis point is 1/100 of 1%). What is the absolute value of the difference between that price, and your answer to part a)? (c) Would the yield have to increase or decrease in order for the bond to increase in value by $1516.24? (d) Based only on your answer to b), approximately how many basis points (bp) would the yield have to move in order for the bond to increase in value by $1516.24? (Answer as a positive integer.)
Problem #5: A 10-year bond has face value (redemption value) $500,000 and quarterly coupons of 1%. Consider the time right after the 12th coupon has been paid, when the yield is 2.5%. (a) What is the price of the bond? (b) Compute the price of the bond if the yield were to increase by 1 basis point (a basis point is 1/100 of 1%). What is the absolute value of the difference between that price, and your answer to part a)? (c) Would the yield have to increase or decrease in order for the bond to increase in value by $1516.24? (d) Based only on your answer to b), approximately how many basis points (bp) would the yield have to move in order for the bond to increase in value by $1516.24? (Answer as a positive integer.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Problem #5: A 10-year bond has face value (redemption value) $500,000 and quarterly coupons of 1%. Consider the time
right after the 12th coupon has been paid, when the yield is 2.5%.
(a) What is the price of the bond?
(b) Compute the price of the bond if the yield were to increase by 1 basis point (a basis point is 1/100 of 1%).
What is the absolute value of the difference between that price, and your answer to part a)?
(c) Would the yield have to increase or decrease in order for the bond to increase in value by $1516.24?
(d) Based only on your answer to b), approximately how many basis points (bp) would the yield have to move in
order for the bond to increase in value by $1516.24?
(Answer as a positive integer.)
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