A 10-year bond with a 8% annual coupon has a yield to maturity of 9%. Which of the following statements is CORRECT?
a. The bond’s current yield is greater than 9%.
b. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.
c. The bond is selling above its par value.
d. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
e. The bond is selling at a premium.
Given about a bond,
Years to maturity = 10 years,
coupon rate = 8%
Face value = $1000
Coupon = 8% of 1000 = $80
YTM = 9%
Using financial calculator to find price of the bond, use following values:
FV = 1000
N = 10
PMT = 80
I/Y = 9
compute for PV, we get PV = -935.82
So, price of the bond = $935.82
current yield = Coupon/price = 80/935.82 = 8.55%
So, option a is incorrect.
Bond is selling at discount and its price is less than its par value, so option c and e are incorrect.
As we move toward years to maturity, price of the bond moves to its par value. So, for this bond, price of the bond increase and will be higher than the price of the same bond last year with same YTM.
So, only option b is correct.
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