## Fixed Income

pooja923
Good Student
Posts: 28
Joined: Fri Mar 11, 2016 11:38 am

### Fixed Income

Consider a bond that pays an annual coupon of 5% and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6%. If the term structure of interest rates does not change over the next twelve-month interval, the bond's price change (as a percentage of par) will be closest to:
1. 0.84.
2. -0.84.
3. 0.00.

Old Price =5/1.06 + 5/1.06 + 105/1.06 = 97.33
On what basis should I calculate the New price?

edupristine
Finance Junkie
Posts: 964
Joined: Wed Apr 09, 2014 6:28 am

### Re: Fixed Income

Hi Pooja
as you calculated the Old price
FV= 100, PMT= 5, n=3, i= 6

in the calculation of New price n=2

Bond Price Change = New Price − Old Price = (5/1.06 + 105/1.062) − (5/1.06 + 5/1.062 + 105/1.063) = 98.17 − 97.33 = 0.84

pooja923
Good Student
Posts: 28
Joined: Fri Mar 11, 2016 11:38 am

### Re: Fixed Income

edupristine
Finance Junkie
Posts: 964
Joined: Wed Apr 09, 2014 6:28 am

### Re: Fixed Income

Hi Pooja
Bond Z has no provisions for early retirement (which are unfavorable for the bondholder, other things equal), so it should yield the lowest. Bond X is noncallable, but allows the issuer to redeem principal through an accelerated sinking fund. Bond Y has an accelerated sinking fund and is callable, giving the issuer the most flexibility, and therefore requiring the highest yield.