Suppose you purchased a $1,000 face value, 15-year bond one year ago....

[huntermurdock]

Hi All,

For some reason I'm having problems with one of the questions on my finance homework. The assignment reads as follows:

Suppose you purchased a $1,000 face value, 15-year bond one year ago. The bond has a 7.125% (annual) coupon rate - but the bonds pay coupons semiannually. You paid $974.24 for the bond last year. However, yields have increased 1%. What is the price of the bond today?

I guess I'm confused about what the yields increasing one percent changes, but if you could just show me how to set it up that would be great!

It is multiple choice so the answers are below:

$991.33
$955.78
$896.14
$912.85
$917.28
$1,000

 

[Denis]

I guess I'm confused about what the yields increasing one percent changes, but if you could just show me how to set it up that would be great!

Keeping it short/simple:
yield to maturity (15 years) when purchased last year: ~7.415%
(I'm assuming annual coupons)

We need to calculate market value using 8.415% (extra 1%).
That's present value of:
14 annual coupons of $71.25 = 573.50
+ 1000/1.08415^14 = 322.65
for total of 896.15

That's all I can do for you! Hope you don't sue me if I'm wrong