Question

A 20 year, 4% coupon bond has a price of $900 and face value of $1000. If the YTM stays the same for the next year, what will be the percentage change in the price of the bond over the next year?

Answer 1

We need to compare the price of the bond this year and next year and find the percentage change in price

You need to use a Financial calculator to solve this problem. You can download it.

N = 20 (The Bond is for 20 Years)

PMT => 4% of 1,000 = -40 ( The coupon 4% is on Face Value)

FV = -1,000 (The Face value of bond is $1,000)

PV = 900 (The Price of the bond is $900)

CPT + I/Y = 4.78807

Price of the bond in the next year with the same YTM

N = 19 (1 year has passed, so 19 years left)

PMT => 4% of 1,000 = -40 ( The coupon 4% is on Face Value)

FV = -1,000 (The Face value of bond is $1,000)

I/Y = 4.78807

CPT + PV = 903.0926

So the price of the bond has changed from 900 to 903.0926 in 1 year.

Percentage Change = {(New Price - Old Price) / Old Price } * 100

= 0.3436%

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