Question

Use the bond term's below to answer the question.
Maturity 6 years
Coupon Rate 4%
Face value $1,000
Annual Coupons
Market Interest Rate 6%

Assuming the YTM remains constant throughout the bond's life, what is percentage capital gains/loss between periods 3 and 4 ?

Group of answer choices:

A. 1.86%

B. 1.77%

C. 1.71%

D. 1.83%

Answer 1

Value of Bond period 4

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 6%

And n is the no of Compounding periods 2 years

Coupon 4%

=

= 963.33

Value of Bond period 3

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 6%

And n is the no of Compounding periods 3 years

Coupon 4%

=

= 946.54

% Change = 963.33 - 946.54 / 946.54 = 1.77%

Option B is correct.