Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

A 6-year 5.9% annual coupon bond is selling to yield 7%. The bond pays interest

ID: 2773605 • Letter: A

Question

A 6-year 5.9% annual coupon bond is selling to yield 7%. The bond pays interest annually. The par value of the bond is $100. What is the price of the 4-year 5.9% coupon bond selling la yield 7%? What is the price of this bond one year later assuming the yield is unchanged at 7%? Suppose that one year later the yield of the bond decreases to 6.1%. What is the price change attributable to moving to maturity assuming no change in the discount rate? What is the price change attributable to a decrease in the discount rate from 7% to 6.1%? What is the total price change?

Explanation / Answer

Price of the 6 year 5.9% annual coupon bond selling to yield 7% = 5.9/(1+7%)1+ 5.9/(1+7%)2+ 5.9/(1+7%)3 + 5.9/(1+7%)4+ 105.9/(1+7%)5 + 105.9/(1+7%)6 = $94.76

a. Time to Maturity = 4 years

Coupon Rate = 5.9%

Yield to Maturity = 7%

Par Value = $100

The bond pays interest annually.

Annual Coupon = 5.9% * 100 = $5.9

Price of the bond = 5.9/(1+7%)1+ 5.9/(1+7%)2+ 5.9/(1+7%)3+ 105.9/(1+7%)4 = $96.27

b) One year later, if yield remains 7%

Price of the initially 6-year bond mentioned at the top = 5.9/(1+7%)1+ 5.9/(1+7%)2+ 5.9/(1+7%)3 + 5.9/(1+7%)4+ 105.9/(1+7%)5 = $95.49

Price of the 4-year bond in part a)= 5.9/(1+7%)1+ 5.9/(1+7%)2+ 105.9/(1+7%)3 = $97.11

c) One year later, the yield of the bond decreases to 6.1%

Considering the 6 year bond mentioned at the top

New Price of the bond = 5.9/(1+6.1%)1+ 5.9/(1+6.1%)2+ 5.9/(1+6.1%)3 + 5.9/(1+6.1%)4+ 105.9/(1+6.1%)5

                                = $99.16

Total Price Change = 99.16 - 94.76 = $4.40

Assuming no change in the discount rate, price change in one year = 95.49 - 94.76 = $0.73

Price Change Due to a Decrease in Discount Rate from 7 to 6.1% = 4.4 -0.73 = $3.67

Price Change Attributable to Moving to Maturity assuming no change in the discount rate = (0.73 / 4.4) * 100

                                                                                                                                            = 16.59%

Price Change Attributable to a decrease in the discount rate from 7% to 6.1% = (3.67 / 4.4) * 100 = 83.41%

Total Price Change = 99.16 - 94.76 = $4.40

Price Change in Percentage Terms = 4.4 / 94.76 = 4.64%

Considering the 4 year bond mentioned in part a)

New Price of the bond = 5.9/(1+6.1%)1+ 5.9/(1+6.1%)2+ 105.9/(1+6.1%)3

                                = $99.47

Total Price Change = 99.47 - 96.27 = $3.2

Assuming no change in the discount rate, price change in one year = 97.11 - 96.27 = $0.84

Price Change Due to a Decrease in Discount Rate from 7 to 6.1% = 3.2 -0.84 = $2.36

Price Change Attributable to Moving to Maturity assuming no change in the discount rate = (0.84 / 3.2) * 100

                                                                                                                                            = 26.25%

Price Change Attributable to a decrease in the discount rate from 7% to 6.1% = (2.36 / 3.2) * 100 = 73.75%

Total Price Change = 99.47 - 96.27 = $3.2

Price Change in Percentage Terms = 3.2 / 96.27 = 3.32%

Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
Chat Now And Get Quote