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Wendy Buys A Bond With A Face Value Of $100 A Time To Maturity Of Three Years A Coupon Of 6% Pa With Semiannual

Question

Wendy buys a bond with a face value of $100, a time to maturity of three years, a coupon of 6% pa with semi-annual

payments and a yield of 3% pa. 12 months later (just before the second coupon is to be paid), the Reserve Bank of Australia unexpectedly increases the cash rate. The yield on Wendy’s bond increases to 3.3% pa.

Required

Calculate the buying price, the price 12 months later and explain why the price has changed.

Finance