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 |

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