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Someone just issued 3-year bonds that make annual coupon payments of $60
Someone just issued 3-year bonds that make annual coupon payments of $60. Suppose you purchased one of these bonds at par value ($1,000) when it was issued. Right after your purchase, market interest rates jumped, and the interest rate) on your bond rose to 7 percent. What is the new price of you bond?
Expert Solution
The price of a bond is the sum of the PVs of the cash flowsassociated with the bond if, it is held to maturity, thediscount rate being the market rate of interest.In this question, the expected cash flows are:*the maturity value of $1000 receivable at EOY 3, and*the 3 annual coupons of $60 each, which is an annuityThe discount rate to be used is the market interest rate of 7%.Therefore price =1000/1.07^3+60*(1.07^3-1)/(0.07*1.07^3) =$ 973.76
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