Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent?\

current price will decrease from $999.99 to $962.31

Explanation:

Current Price will will decrease from $999.99 to $962.31

Explanation:

Let us assume the bond Face Value is $1000.

coupon = $1000 X 5% = $50

R = 5%

n = 10

Present Value = $1000/(1+0.05)^10 + 50(1 - (1+0.05)^-10 )/0.05

Present Value = 613.9132 + 386. 0867

Present Value =  $999.99

R = 5.5%

Present Value = $1000/(1+0.055)^10 + 50(1 - (1+0.055)^-10 )/0.055

Present Value = 585.43057 + 376.88129

Present Value = $962.31

When interest rate increases from 5% to 5.5% the present value which can be seen as the current price because it represents the maximum current price that can be charged for a bond will decrease from 999.99 to 962.31

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explanation:

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