You own a 6.5 percent, semiannual coupon bond that matures in 12 years. The par value is $1,000 and the current yield to maturity is 6.4 percent. What will the percentage change in the price of your bond be if the yield to maturity suddenly increases by 25 basis points?

The answer is -2.04%

Explanation:

Current price of bond:

Number of periods(N) = 24(12 years x 2)

Yield-to-maturity (YTM) = 3.2%( 6.4% ÷ 2)

Present Value( Price of bond) = ?

Coupon payment (PMT)= $32.5[(6.5% ÷ 2) x $1,000]

Future value(FV) = $1,000

Using a Financial calculator, the price of the bond is $1,008.29.

Price of bond when YTM increases by 25 basis point(25 percent)

Number of periods(N) = 24(12 years x 2)

Yield-to-maturity (YTM) = 3.325%( 6.65% ÷ 2)

Present Value( Price of bond) = ?

Coupon payment (PMT)= $32.5[(6.5% ÷ 2) x $1,000]

Future value(FV) = $1,000

Using a Financial calculator, the price of the bond is $987.73

Percentage change = (present price /past price) - 1

-2.04%

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