Assume that you own a $ 1 million par value corporate bond that pays 7 percent in

Question:

Assume that you own a $ 1 million par value corporate bond that pays 7 percent in coupon interest (3.5 percent semiannually), has four years remaining to maturity, and is immediately callable at par. Its current market yield is 7 percent and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2 percent semiannually), the bond will be called.

a. Calculate the bond’s price if the market rate increases by 50 basis points (0.25 percent semiannually) using the present value formula from Chapter 6.

b. Calculate the bond’s effective duration assuming a 50 basis point increase or decrease in market rates.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...