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.
|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|
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