A newly issued bond has a maturity of 4 years and pays a 7, Ask an Expert

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A newly issued bond has a maturity of 4 years and pays a 7% annual coupon. The current discount rate is 6.75%, and the face value is $1000.

(a) What is the price of this bond?

(b) What is the duration of the bond?

(c) Find the price of this bond if rates decrease by 1 bp (basis point) using the duration rule for price sensitivity. Then, re-price the bond using the normal bond pricing formula or your financial calculator. How much is the pricing error from the duration rule?

(d) Perform the same steps for a 100 bp decrease in interest rate. What is the pricing error now?

(e) What is the name of the effect that is causing what you are observing?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92327999

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