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You find a bond with 29 years until maturity that has a coupon rate of 9.5 percent and a yield to maturity of 8.9 percent. Suppose the yield to maturity on the bond increases by 0.25 percent. a. What is the new price of the bond using duration and using the bond pricing formula? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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hoangkhangpham94

Answer:

The answer is: $1,035.23

Explanation:

Assume the face value of the bond is $1,000. So, annual coupon = 1,000 x 9.5% = $95

The price of the bond is equal to the sum of present value of the coupon stream ( 29 annual coupon payments) and present value face value repayment in 29 years time; discounting at the yield to maturity rate.

Year to maturity: 8.9% + 0.25% = 9.15%.

So: Price of the bond = [ (95/0.0915) x ( 1 - 1.0915^(-29) ) ] + 1,000/1.0915^29 = $1,035.23.

So the answer is $1,035.23

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