Question

A 6% coupon 20-year bond was bought 8 years ago is priced now to offer a 6% yield to maturity. You believe that in one year, the yield to maturity will be 5%. What is the change in price the bond will experience in dollars from now to one year later? In percentage?

Answer #1

Since the bond is bought 8 years ago,

Current term to maturity = 20-8 = 12

Since currently, coupon rate = YTM, bond price = par value = $1000

Price of the bond, 1 year later:

Value of a bond is given by the excel function, PV = PV(R,N,PMT,FV)

R - YTM = 0.05

N - years to maturity = 12-1 = 11

PMT - Coupon = 0.06*1000 = 60

FV - Par value = 1000

Using excel function, PV = PV(R,N,PMT,FV)

PV(0.05,11,-60,-1000) = 1083.06

Change in price = 1083.06 - 1000 = $83.06

In percentage = Difference/Beginning price = 83.06/1000 = 0.08306 = 8.306%

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