The correct answer is A ($0.57). The value of a bond is calculated using the present value formula:

PV = [PMT / (1 + r)^1] + [PMT / (1 + r)^2] + ... + [(PMT + FV) / (1 + r)^N]

PV = [PMT / (1 + r)^1] + [PMT / (1 + r)^2] + ... + [(PMT + FV) / (1 + r)^N]

where:

• PV = Present value (price of the bond)
• PMT = Coupon payment per period
• FV = Future value (par value of the bond)
• r = Market discount rate per period
• N = Number of periods to maturity

Calculation Steps:

1. Initial Yield: Using the calculator inputs (N = 6, PMT = $2.5, FV = $100, PV = $108), the yield is 1.114% semiannually (2.228% annually).
2. New Yield: After a 100 bps decrease, the new yield is 0.614% semiannually.
3. New Price: With N = 4, PMT = $2.5, FV = $100, and r = 0.614%, the new price is $107.43.
4. Change in Value: $108.00 - $107.43 = $0.57.

Why Not B or C?

• B ($1.52) incorrectly fails to annualize the interest rate before computing the change.
• C ($3.08) incorrectly uses the same time to maturity without adjusting for the passage of one year.