CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Max Factoring purchased a four-year bond with an annual coupon of 9%. By how much does the bond price change if the term structure shifts up in a parallel manner by 2%? Assume a flat term structure of interest rates at 7%.
A. -$67.74
B. $67.74
C. -$34.56
Explanation: The bond price has to decrease if the interest rate increases, since a higher discount rate has to be used to compute the present value of the bond cash flows (N=4; FV=1000; PMT=90: I/Y=7%; CPT PV = 1067.74). As the new interest rate equals the coupon rate of the bond, the bond will be priced at par value. Bond Price Change = 1000 - 1067.74= -$67.74

User Contributed Comments 8

User Comment
danrow Can someone explain??? if the bond has a coupon of 9% and a ytm of 7%, how could it be that the price increase should be -???
thekapila well its just if interest is increasing then price has to decrease..as you know the inverse relation between interest n price of bond.
chamad Why computing on an annual basis instead of semi-annual?
Xocrevilo Chamad: the question says "annual coupon". If it had not said that, then I think it would be best to assume semi-annual.
jnptrsn1 This difference between annual and semi annual... it is infuriating.
eleanor088 how do we know when FV=100 and when FV=1000
thebkr7 @eleanor088 It doesn't matter. You can use either and get 6.774 or 67.74 you'll be able to see it.
NBlanco An understanding of the convexity and inverse effect would not give you the answer but would help rule out other selections when looking at answer choices
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