Answer: current price will decrease from $999.99 to $962.31
Explanation:
Answer: Current Price will will decrease from $999.99 to $962.31
Explanation:
Let us assume the bond Face Value is $1000.
coupon = $1000 X 5% = $50
R = 5%
n = 10
Present Value = $1000/(1+0.05)^10 + 50(1 - (1+0.05)^-10 )/0.05
Present Value = 613.9132 + 386. 0867
Present Value = $999.99
R = 5.5%
Present Value = $1000/(1+0.055)^10 + 50(1 - (1+0.055)^-10 )/0.055
Present Value = 585.43057 + 376.88129
Present Value = $962.31
When interest rate increases from 5% to 5.5% the present value which can be seen as the current price because it represents the maximum current price that can be charged for a bond will decrease from 999.99 to 962.31
