QUESTION 3

Your finanical advisor informed you that bonds are a good invesmtent option for you. Therefore, you invested in a bond that has a par value of AED 1000 and pays interest with a coupon rate of 5%. The bond was issued with a maturity of 14 years. The yield to maturity of the bond is 18 %. However, recently the bond issuers has been facing some problems that resulted in an increase in the risk and therefore, the required return increased by 4%.

Given this change in the required return, what will be the percentage change in the price of the bond that you invested? Please write your final answer in the box below. Please write the formula, steps for calculation in the space provided in the next question. Also, elaborate, what will be the effect on the price of the bond, if the required return decreased by 87%?

Please provide details of calculations of the change in price for this case as well.