Consider a $100 par value bond with 7% paid annually and 5 years to maturity. At a discount rate of 6.0 percent, the value of the bond is $104.21. One year later, the appropriate discount rate has risen to 6.5% and the bond’s value is 101.71. what part of this change in value is most likely attribute to the passage of time ? A o.37 B 0.74 C 1.76 anyone can give me a hand? thanks
.74? N=4, I/Y=6, Pmt=7, FV=100, solve for PV, PV=103.47 PV_0 104.21 minus PV_1 103.47 = 0.74
I think the answer should be B because there are two factors which are responsible for bringing the value down for this bond: time(1 year) and interest rate change(6 to 6.5). 101.71 is combined with time and interest change both. You can get this value by changing N=4 and I/Y=6.5. If you only change N=4 and keep the yield at 6, present value will be 103.465, difference between both values(104.21 and 103.465) will be attributable to the passage of time. I hope it helps!
- calculate the PV at 1/y = 6% with N=5, FV = 100 PMT = 7 2) calculate what shd be the PV one year later i.e N=4 with the same 6% 3) deduct the difference between the 2 PV, that is the change due only to the passage of time which is 0.74 . So answer B With the new rate at 6.5%, you add to the time value of money an additional effect of change in the YTM which is 1.76 - 0.74 = 1.02
thanks guys. the answer is B.