You are required to produce a table showing bond values and the impact of changes in interest
Question:
You are required to produce a table showing bond values and the impact of changes in interest rate over the life of a bond and a diagram demonstrating the link between the changes in values (due to changes in interest rate) and time to maturity.
The bond has a face value of $1,000, pays a coupon rate of 7% p.a paid annually and it is issued with 10 years to maturity. All calculations should be executed in excel.
Your table should show the following:
• The value of the bond, year by year (from date of issue until its maturity), assuming all other things remain the same.
• The value of the bond, year by year, from date of issue until its maturity, assuming that market interest rate increases by 1.5% (hence yield to maturity increases by 1.5%), all other things remain the same.
• The potential % change in value, year by year, from the date of issue until its maturity.
The % change in value demonstrates the impact of the increase in interest rate on the bond value (or interest rate risk), for each year of maturity.
• From your table produce a diagram that demonstrates the relationship between % change in value and time to maturity.
The initial market interest rate (yield to maturity) to be used is 10%.
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter