Assume that you own a $ 1 million par value corporate bond that pays 7 percent in coupon interest (3.5 percent semiannually), has four years remaining to maturity, and is immediately callable at par. Its current market yield is 7 percent and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2 percent semiannually), the bond will be called.
- Calculate the bond's price if the market rate increases by 50 basis points (0.25 percent semiannually) using the present value formula from Chapter 6.
- Calculate the bond's effective duration assuming a 50 basis point increase or decrease in market rates.