Question

A 5.90 percent coupon bond with 10 years left to maturity is priced to offer a yield to maturity of 6.8 percent. You believe that in one year, the yield to maturity will be 6.0 percent. What is the change in price the bond will experience in dollars?

Answer 1

Assume interest payments are paid semi-annually

Compute the current bond price:

		PV factor 6.8%/2 20	PV factor 6.8%/2	PV
Interest Payament	29.5	=+(1-(1+6.8%/2)^(-20))/(6.8%/2)	14.3419	423.09
Maturity Value	1000	=+1/(1+6.8%/2)^(20)	0.5124	512.38
Value of Bond				935.46

Now compute the price in one year:

		PV factor 6%/2 18	PV factor 6%/2 18	PV
Interest Payament	29.5	=+(1-(1+6%/2)^(-18))/(6.%/2)	13.7535	405.72
Maturity Value	1000	=+1/(1+6%/2)^(18)	0.5874	587.39
Value of Bond				993.12

So the dollar change in price is: $993.12 − $935.46 = $57.66

if annual

		PV factor 6% 10	PV
Interest Payment	59	7.0890	418.249641706435
Maturity Value	1000	0.5179	517.949565490889
Value of Bond			936.199207197323
		PV factor 6 9	PV
Interest Payment	59	6.80169	401.299844195476
Maturity Value	1000	0.59190	591.898463530025
Value of Bond			993.20

Change =993.20-936.20=57.00