Question If the yield to maturity expected by investors chan

Question: If the yield to maturity expected by investors changes to 11%, what will be the market price of bond #1 and bond #2?

Solution

Bond # 1

Present value of cash flows from Bond # 1 = Coupon amount * Cumulative P.V. factor for 4 Years @ 11 % + Principal amount * P.V. factor for fourth year @ 11 %.

= 1000 * 10 % * 3.102 + 1000 * 0.659

   = 100 * 3.102 + 1000 * 0.659

   = 310.20 + 659

= $ 969.20

Thus,the market price of Bond # 1 is $ 969.20 if the yield to maturity expected by investors changes to 11%.

Bond # 2

Present value of cash flows from Bond # 2 = Coupon amount * Cumulative P.V. factor for 10 Years @ 11 % + Principal amount * P.V. factor for tenth year @ 11 %.

= 1000 * 10 % * 5.889 + 1000 * 0.352

   = 100 * 5.889 + 1000 * 0.352

   = 588.90 + 352

= $ 940.90

Thus,the market price of Bond # 2 is $ 940.90 if the yield to maturity expected by investors changes to 11%.