- 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**

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

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**User Contributed Comments**
8

User |
Comment |
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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 |