Answer please 100% correct What will be the price of bond (one year from now) wh

Question

Answer please 100% correct

What will be the price of bond (one year from now) when you will sell. will you have capital gain or loss?

Question 1-(26 points) Today, you Just purchased a 5-year annual coupon bond with yield to maturity of 4%. The coupon rte is 6% and par value is $1,000. You plan to hold this bond for Just 1 year and sell it at the end of the first year. According to the analyst forecast, at the end of the Ist year, this bond's yield to maturity will drop to 2% and will then stay at 2% till maturity.

Explanation / Answer

Coupon = 0.06 * 1000 = 60

Rate in 1 year = 2%

Number of year to maturity = 4

Price of bond in 1 year = Coupon * [ 1 - 1 / ( 1 + r)n] / r + Fv / ( 1 + r)n

Price of bond in 1 year = 60 * [ 1 - 1 / ( 1 + 0.02)4] / 0.02 + 1000 / ( 1 + 0.02)4

Price of bond in 1 year = 60 * 3.807729 + 923.845

Price of bond in 1 year = $1,152.31

We will have a capital gain as the price will increase when interest rate falls.

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