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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

INTEREST RATE SENSITIVITY .An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell, and each then had a new YTM of 7% What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table:

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Summary Introduction

To identify: Price of bond at interest rate of 8% and 7% and percentage change.

Introduction:

Bond Valuation: Bond valuation refers to the evaluation of bonds value at any point of time which can be used for decision making. Valuation of bond is done for comparison and analysis.

Explanation

10-year, 10% annual coupon:

Interest rate is 10% or 0.1.

Yield to maturity (YTM) is 8%.

Yield to maturity (YTM) is 7%.

Par value of bond is $1,000.

Maturity is after 10 years.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)t+Parvalue(1+rd)N

Where,

  • INT is the interest rate
  • N is the number of year for maturity.
  • Rd is the rate of discount.

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