Question

# A bond with a \$1,000 face value has a 5% annual coupon rate. The bond matures...

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.]

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

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