Question

# A 10 year Treasury bond with face value of \$1000 is currently offering 8% annual coupon...

A 10 year Treasury bond with face value of \$1000 is currently offering 8% annual coupon rate and 6% yield to maturity. Which of the following statements about the bond is NOT true?

1. The market price of bond is higher than \$1000.
2. A year from now if the yield to maturity stays the same, the market price of the bond will be higher than what it is today.
3. If you buy the bond today and hold it until the bond matures, your annual return will be about 6% when there is no default.
4. If the yield to maturity becomes 7% tomorrow, the price of the bond will be lower than what it is today.

Correct answer: b. A year from now if the yield to maturity stays the same, the market price of the bond will be higher than what it is today.

Yield rate is less than Coupon rate thus market price of bond is higher than its Face value.

When yield rate remain constant than market price of bond approaches its face value as maturity come closer.

Thus, next year market price of bond would be lower than current year price.

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