The current (year t) price of a 5-year coupon bond is 100. It has a coupon rate of 5%, a yield to maturity of 5% and a face value of 100. In year t +1 news arrives that short term interest rates will be twice as high for the foreseeable future. What is the percentage change in the price of the bond? Why did the bond’s price have to change in this way?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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The current (year t) price of a 5-year coupon bond is 100. It has a coupon rate
of 5%, a yield to maturity of 5% and a face value of 100. In year t +1 news
arrives that short term interest rates will be twice as high for the foreseeable
future. What is the percentage change in the price of the bond? Why did the
bond’s price have to change in this way?

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