Original practice · fully worked
Original variant: price effect of doubling a bond term
A face-1,000 bond pays semiannual coupons of 27.8038 and yields 8% nominal convertible semiannually. By how much does its price decrease if its term changes from four years to eight years, with coupon and yield unchanged?
- A
40.00 - B
50.00 - C
60.00 - D
70.00 - E
80.00
Answer and calculation
Subtracting the sixteen-period price from the eight-period price gives a decrease of 60.00, choice C.
Setup
Setup
Translate four and eight years into eight and sixteen half-year periods.
P8=27.8038a8∣0.04+1000v8 Model
Model
Price each bond using the same semiannual coupon and 4% periodic yield.
P16=27.8038a16∣0.04+1000v16 Compute
Compute
The shorter-term price exceeds the longer-term price by approximately 60.0001.
P8−P16=60.0001 Answer
Answer
Doubling the term decreases price by 60.00, corresponding to choice C.
price decrease=60.00(C) Calculator reproduction
BA II Plus keystrokes
- 2nd CLR TVM; 2nd I/Y; 1 ENTER; ↓; 1 ENTER; 2nd CPT; 2nd PMT; if BGN is displayed, 2nd ENTER; 2nd CPT; 8 N; 4 I/Y; 27.8038 PMT; 1000 FV; CPT PVPV = -917.89END mode; I/Y is the half-year effective yield for the four-year term.
- 2nd CLR TVM; 2nd I/Y; 1 ENTER; ↓; 1 ENTER; 2nd CPT; 2nd PMT; if BGN is displayed, 2nd ENTER; 2nd CPT; 16 N; 4 I/Y; 27.8038 PMT; 1000 FV; CPT PVPV = -857.89; decrease = 60.00END mode; I/Y is the half-year effective yield for the eight-year term; subtract price magnitudes.