A bond with a 7-year duration is worth $1,079, and its yield to maturity is 7.9%. If the yield to maturity falls to 7.75%, you would predict

A bond with a 7-year duration is worth $1,079, and its yield to maturity is 7.9%. If the yield to maturity falls to 7.75%, you would predict that the new value of the bond will be approximately:_____________.

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  1. Answer:

    $1,087.27  

    Explanation:

    The new value of the bond is the new price of the bond calculated using yield to maturity of 7.75% instead of the original yield of 7.9% using excel pv formula provided thus:

    =-pv(rate,nper,pmt,fv)

    Before that we need to determine the pmt which is the annual coupon on the bond.

    =pmt(rate,nper,-pv,fv)

    rate is the original yield ot 7.9%

    nper is the duration of 7 years

    pv is the initial market price of $1,079

    fv is the face value of $1000

    =pmt(7.9%,7,-1079,1000)=$ 94.12  

    The new price is computed thus:

    =-pv(7.75%,7,94.12,1000)=$1,087.27  

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