A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed unt

Question

A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? Select one: O a. If market interest rates decline, the price of the bond will also decline. O b. The bond is currently selling at a price below its par value O c. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. O d. The bond should currently be selling at its par value. O e. If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today

Explanation / Answer

e.If market interest rates remain unchanged, the bonds price one year from now will be higher than it is today.

Working:

Bonds price is the present value of cash flows from bonds -(a) Coupon Payment and (b) Par Value at maturity.Cash flows from bonds are discounted at market interest rate.Bonds Price and Discount rate has opposite relation.It means if market interest rate falls, bonds price increase and vice versa.Further, as bonds life coming closer to its maturity, bonds price increases.So, if market rate remains same and life of bonds reduced, bonds price will increase.The current market rate is below coupon rate .So, bonds are currently selling at premium.When coupon rate and market rate both are same then bonds are priced at it's par value.

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