A 7.5% coupon, semiannual-pay, five-year bond has a yield to maturity of 6.80%. Over the next year, if the bond's yield to maturity remains unchanged, its price will:
A. increase.
B. decrease.
C. remain unchanged.
Answer is B. Decrease
In this question, YTM < Coupon rate. This implies price of bond will be greater than par value. Now, when the price of bond is greater than par value and if YTM remains constant, as the bond would move towards maturity, its price will decrease and move towards par value.
Had the price been less than par value, than it would have increased and moved towards par value. This would have been the case when YTM would have been greater than coupon rate.
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