(a) The price of a 5 percent bond with principal of Rs. 1000 and a maturity of 15 years is Rs. 677.57. If that yield is increased by 50 basis points…
BBS Management of Financial Institutions · 2078 · Solved Question with Answer
(a) The price of a 5 percent bond with principal of Rs. 1000 and a maturity of 15 years is Rs. 677.57. If that yield is increased by 50 basis points from 9 percent to 9.5 percent, the price would be Rs. 647.73. If the yield is decreased by 50 basis points from 9 percent to 8.5 percent, the price would be Rs. 709.35. Calculate percentage change in price.
(b) What is the cash flow of a 6 percent coupon bond that pays interest annually, matures in seven years, and has a principal of Rs. 1000. Assuming a discount rate of 8 percent, what is the price of this bond?
(c) Suppose you own a bond that pays Rs. 75 yearly in coupon interest and that is likely to be called in two years (because the firm has already announced that it will redeem that issue early). The call prices will be Rs. 1,050. What is the price of your bond now in the market if the appropriate discount rate for this asset is 9 percent?