Calculate The Change In Price Of Coupon Bond With Change In Interest Rate

Question

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000.

1. What is the duration of this bond?
    a. 5 years.
    b. 4.31 years.
    c. 3.96 years.
    d. 5.07 years.
    e. Not enough information to answer.

2. If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation?
    a. –$7.98.
    b. –$7.94.
    c. –$3.99.
    d. +$3.99.
    e. –$7.94.

3. Using present value bond valuation techniques, calculate the exact price of the bond after the interest rate increase of 20 basis points.
    a. $1,007.94.
    b. $992.02.
    c. $992.06.
    d. $996.01.
    e. $1003.99.

Summary

These short questions belong to Finance and the questions deal with a 5 year, 8% coupon bond selling at $1000. The duration of the bond, the price of the bond based on the increase in interest rates needs to be calculated.

Total Word Count 97