- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 44. Introduction to Fixed-Income Valuation
- Subject 1. Bond Prices and the Time Value of Money

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**CFA Practice Question**

Consider a five-year, 5% coupon, semi-annual payment bond and a 10-year, 5% coupon, semi-annual payment bond. The price and required return of both are $1,000 and 5%, respectively. If the level of market rates increases such that both bonds have required returns of 6% ______

A. the price of the five-year bond will decrease by 4.49%.

B. the price of the 10-year bond will decrease by 7.36%.

C. the price of the five-year bond will decrease by 4.26%.

**Explanation:**The new price of the five-year bond is $957.35, and the new price of the 10-year bond is $925.61.

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**User Contributed Comments**
9

User |
Comment |
---|---|

humphrey |
is it calculated using McCauly duration? |

kalps |
That has nothing to do with it all you do is calculate the npv of the cash flows under the new interest rate - required returun that is where they get the answer from |

geet |
This is wrong. The coupons are semi-annual so for the 5 year there is 10 payments and 20 for the other. The price of the 5 year bond is 925 and the price of the 10 year is 857. |

Pooh |
To calculate the PV for the 5-year: FV=1000, I=3, PMT=25, N=10, PV=957.35 |

Shelton |
FV=1000, PMT=25, I=3, N=10 => -PV/1000-1=-4.265% N=20=> -PV/1000-1=-7.44% |

uberstyle |
just remember coupon payment is $25, not $2.5. doh! |

Spawellian |
thanks uberstyle... i did the same |

kellyyang |
The price 5 yrs: FV=1000, Pmt=25, I=6/2=3; N=5*2=10 -> pv=957.35 957.35/1000-1=-4.265 |

gill15 |
I used Duration and got A - 4.49% on the dot. I guess now I'm just confused when to use the duration method of price change and to just calculate it. I guess duration way is just an estimate and this is more accurate. |