# SS 9 bond problem..plz help

A firm issues a \$10 million bond with a 6% coupon rate, 4-year maturity, and annual interest payments when market interest rates are 7%. The initial book value of the bonds is: A. \$9,400,000. B. \$9,661,279. e. \$10,000.000. D. \$10,338.721. plz help…

B? Coupon rate is less than market rate, hence the bond will be selling at a discount. N - 4 I/Y - 7 PMT - 600,000 FV - 10,000,000 CTP PV = 9,661,278.87

Ya …but A or B?? C n D can be eliminated…by just reading question… plz help…

B is the answer. Ditchdigger2CFA explained it well. Milos

Thnx a lot…

There’s a better way to do the problem. Eliminate C and D immediately. Now to decide between A and B, imagine that it was a zero. Then it would have duration = 4 so a 1% change in yield would cause the bond to drop 4% to 9.6 M. Since it’s not a zero, it drops in value less so answer must be B. The same process lets you eyeball a problem and say, uh, I dunno, the bond drops 3.5% because the duration is less than a zero but not that much less. You can do the problem in 2 seconds and get on to the next one.

Amazing…Thanx a ton…

JoeyDVivre…i was not able to follow ur explanation…i know thats very dumb to say…but better safe then sorry !!! Agreed eliminate C and D …coz market yield > bond yield implies Bond price will fall down. To start with i got lost at this point…“imagine it was zero”…??? thanks for ur patience.

Bee Wrote: ------------------------------------------------------- > JoeyDVivre…i was not able to follow ur > explanation…i know thats very dumb to > say…but better safe then sorry !!! > > Agreed eliminate C and D …coz market yield > > bond yield implies Bond price will fall down. > > To start with i got lost at this > point…“imagine it was zero”…??? > > > thanks for ur patience. When you get to fixed income you’ll learn about calculating bond duration. Joey’s method didn’t even phase me as an option, but it worked a lot better. “Now to decide between A and B, imagine that it was a zero. Then it would have duration = 4 so a 1% change in yield would cause the bond to drop 4% to 9.6 M.” By definition zero coupon bonds have duration (aka interest rate risk) equal to their YTM. Since this is not a zero, the drop is not quite to 9.6M.

It makes much more sense now…!! Thank you ditchdigger2CFA…though its not crystal clear…but am sure it will make complete sense when i am done with fixed income section.