A 10%, 10-year bond is sold to yield 8%. One year passes, and the yield remains...

A 10%, 10-year bond is sold to yield 8%. One year passes, and the yield remains unchanged at 8%. Holding all other factors constant, the bond's price during this period will have:

a. Increased

b. Decreased

c. Remained constant

Solutions

Expert Solution

I am assuming face value to be 100

Coupon = 0.01 * 10 = 10

rate = 8%,

Bond price when 10 years remaining = 10 * [ 1- [ 1 / 1 + 0.08)¹⁰]] / 0.08 + 100 / ( 1 + 0.08)¹⁰

Bond price when 10 years remaining = 10 * 6.7101 + 46.319349

Bond price when 10 years remaining = 113.42

Bond price when 9 years remaining =10 * [ 1- [ 1 / 1 + 0.08)⁹]] / 0.08 + 100 / ( 1 + 0.08)⁹

Bond price when 9 years remaining = 112.49

Therefore, the bond price decreased

jeff jeffy answered 1 year ago

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