A 6.45 percent coupon bond with fifteen years left to maturity is priced to offe
ID: 2775749 • Letter: A
Question
A 6.45 percent coupon bond with fifteen years left to maturity is priced to offer a 7.9 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. What is the change in price the bond will experience in dollars?
A 6.45 percent coupon bond with fifteen years left to maturity is priced to offer a 7.9 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. What is the change in price the bond will experience in dollars?
Explanation / Answer
Answer:
Compute the Bond price :
= 32.50 * { 1-1/(1+0.036)26 /0.036} + 1,000 / (1 + 0.036)28
= $ 567.42 + $ 371.47 = $ 938.89
Now the compute price in one year
Bond Price = 32.50 * { 1-1/(1+0.034)26 /0.034} + 1,000 / (1 + 0.034)28
= $ 555.14 + $ 419.24 = $974.38
So the dollar change in price is
$ 974.38 - $ 938.89 = $ 35.49