Question

A bond with a $1,000 face value has a 5% annual coupon rate. The bond matures in 19 years. The current YTM on the bond is 3.1%. If you were to buy this bond and hold it for 7 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.]

Answer 1

Face/Par Value of bond = $1000

Annual Coupon Bond = $1000*5%

= $50

No of years to maturity(n) = 19 years

Current YTM = 3.1%

Calculating the Market price of Bond:-

Price = $709.891 + $559.868

Price of Bond = $1269.76

- You hold the Bond for 7 years, and the YT remains the same.

No of years to maturity(n) = 19 years - 7 years = 12 years

YTM = 3.10%

Calculating the Market price of Bond:-

Price = $494.742 + $693.26

Price of Bond = $1188.0

- Chnage in price while holding the Bond = $1188.00 - 1269.76 = -$81.76

So, price drop by $81.76