Question

A bond with a $1,000 face value has a 5% annual coupon rate. The bond matures in 18 years. The current YTM on the bond is 3.2%. If you were to buy this bond and hold it for 6 years, how much would the price change while you hold it? Assume the bond's YTM remains the same. Answer in dollars and round to the nearest cent. ​[Hint: 1) If the price drops, the change is a negative number. 2) Compute and compare the prices under the two scenarios.]

Answer 1

Face/Par Value of bond = $1000

Annual Coupon Bond = $1000*5%

= $50

No of years to maturity(n) = 18 years

Current YTM = 3.2%

Calculating the Market price of Bond:-

Price = $676.190 + $567.238

Price of Bond = $1243.43

- You hold the Bond for 6 years, and the YT remains the same.

No of years to maturity(n) = 18 years -6 years = 12 years

YTM = 3.2%

Calculating the Market price of Bond:-

Price = $491.810 + $685.241

Price of Bond = $1177.05

- Chnage in price while holding the Bond = $1177.05 - 1243.43 = -$66.38

So, price drop by $66.38