Question

A 7.90 percent coupon bond with 13 years left to maturity is priced to offer a yield to maturity of 8.6 percent. You believe that in one year, the yield to maturity will be 8.2 percent. What is the change in price the bond will experience in dollars? The Answer is not 31.17...

Answer 1

Solution-

Years to maturity (nper)= 13 years*2= 26

Assume par value of bond =$1000

Assume compounding is semiannually

Coupon rate = 7.90%

Coupon amount ( PMT) = 7.90%/2*1000= $39.50

Yield to maturity ( Rate ) = 8.6%/2= 4.3%

Price of bond ( PV) = ?

PV ( Rate, nper, PMT, FV)

PV ( 4.6%, 26, 39.5,1000)= $902.58

After one year yield to maturity change to 8.2%

PMT = $39.5

Rate = 8.2%/2= 4.1%

Nper = 12 years*2= 24

FV = $1000

PV ( 4.1%, 24, 39.5,1000)= $977.36

Change in price = $977.36 - $902.58= $74.78