Question

A bond with a face value of $1,000 matures in 12 years and has a 11% semiannual coupon. The bond has a current yield of 8%. Based on the information, you would expect the bond price to _____________ in one year. (Hint: Find bond price and YTM) Select one: a. Decrease by 1.54% b. Increase by 1.45% c. Decrease by 0.77% d. Decrease by 5.68% e. Increase by 0.77%

Answer 1

Answer:

a. Decrease by 1.54%

Explanation:

The computation fo the change in the price in one year is shown below:

The bond price is

= $1,000 × 11% ÷ 0.08

= $1,375

Now the YTM is

Given that

Par value = $1,000

PMT = $1,000 × 11% ÷ 2 = $55

NPER  = 12 × 2 = 24

PV = $1,375

The formula is shown below:

= RATE(NPER;PMT;-PV;FV;TYPE)

AFfter applying the above formula, the rate is

= 3.2304% × 2

= 6.46%

And, the current yield is 8%

So, there is a decrease of

= 6.46% - 8%

= 1.54%

Hence, the first option is correct