Question 5 A bond has a face value of $1,000, coupon rate of 8%, and matures in 6 years. Imagine that the market interest rate is 6%, but immediately after you buy the bond the rate drops to 5%. What is the immediate effect on the bond price? Hint: the effect is the price of the bond after the change minus the price of the bond before the change. Enter the resulting price effect in dollars, rounded to the nearest cent (2 decimals). Use a the '-' sign if the effect is negative.
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The price of a bond is calculated using the formula: Price = C * (1 - (1 + r)^-n) / r + FV / (1 + r)^n where: C = annual coupon payment = 1000 * 8% = $80 r = market interest rate = 6% n = number of years to maturity = 6 FV = face value of the bond = $1000 So, Show more…
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