A 6.65 percent coupon bond with fifteen years left to maturity is priced to offe

Question

A 6.65 percent coupon bond with fifteen years left to maturity is priced to offer a 8.3 percent yield to maturity. You believe that in one year, the yield to maturity will be 8.0 percent. What is the change in price the bond will experience in dollars? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

A 6.65 percent coupon bond with fifteen years left to maturity is priced to offer a 8.3 percent yield to maturity. You believe that in one year, the yield to maturity will be 8.0 percent. What is the change in price the bond will experience in dollars? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Bond Price Now:

Nper = 15 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 8.3% (indicates YTM)

PMT = 1000*6.5% = 65 (indicates the amount of interest payment)

Bond Price = PV(Rate,Nper,PMT,FV) = PV(8.3%,15,65,1000) = $848.71

---------

Bond Price 1 Year from Now:

Nper = 14 (indicates the period)

PV = ? (indicates the price)

FV = 1000 (indicates the face value)

Rate = 8% (indicates YTM)

PMT = 1000*6.5% = 65 (indicates the amount of interest payment)

Bond Price = PV(Rate,Nper,PMT,FV) = PV(8%,15,65,1000) = 871.61

----

Change in Bond Price = $22.90

Answer is $22.90

Thanks.

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