A 8.40 percent coupon bond with 14 years left to maturity is priced to offer a 9
ID: 2735703 • Letter: A
Question
A 8.40 percent coupon bond with 14 years left to maturity is priced to offer a 9.1 percent yield to maturity. You believe that in one year, the yield to maturity will be 8.7 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 8.40 percent coupon bond with 14 years left to maturity is priced to offer a 9.1 percent yield to maturity. You believe that in one year, the yield to maturity will be 8.7 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
Assume the 8.40 % bond price be $100 Present Yield to Maturity = 9.10% Return on appreciation in bond value = 9.10% - 8.40% = 0.70% Hence Gain on sale of bond = $100 * 0.70% = $0.70 Yield to maturity after one year = 8.7% Return on appreciation in bond value = 8.70% - 8.40% = 0.30% Hence Gain on sale of bond after 1 year = $100 * 0.30% = $0.30 Change in bond price = $0.30 - $0.70 = $ 0.40
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