Question

Consider a 7-year semi-annual bond with an annual coupon rate of 9% and a bond equivalent yield (BEY) of 12%. If interest rates remain constant, one year from now the bond’s price will be __________.

None of the above.

It depends if it is a semi-annual or an annual bond.

Higher.

The same.

Lower.

Answer 1

Here, the bonds equivalent yield is higher than its coupon rate, means the bond is trading at a discount i.e. at a price which is less than its face value.

As the bonds maturity decreases the bond's price goes in the direction of its face value and on maturity it becomes equal to face value.

Here, at present the bond is trading at discount so after one year if the interest rates remains constant, the bond price will increase.

Answer : Higher