Problem #5: A 10-year bond has face value (redemption value) $400,000 and quarterly coupons of 2.5%. Consider the time right after the 12th coupon has been paid, when the yield is 4.8%. (a) What is the price of the bond? (b) Compute the price of the bond if the yield were to increase by 1 basis point (a basis point is 1/100 of 1%) What is the absolute value of the difference between that price, and your answer to part a)? (c) Would the yield have to increase or decrease in order for the bond to increase in value by $872.38? (d) Based only on your answer to b), approximately how many basis points (bp) would the yield have to move in order for the bond to increase in value by $872.38? (Answer as a positive integer.) Problem #5(a): Answer correct to 2 decimals. Problem #5(b): Answer correct to 2 decimals. (A) Decrease (B) Increase Problem #5(c): Select Problem #5(d): Answer as a positive integer

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Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.