Question

A 6 percent coupon bond, with 12 years left to maturity, is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price of the bond, in dollars? Assume semi-annual interest payments and $1,000 par value. (Round your answer to 2 decimal places. Do not include a dollar sign. If the price decreases, use a negative "-" sign. If the price increases, use a "+" sign.)

Answer 1

Sol:

Par value (FV) = $1,000

Annual coupon rate = 6%, Semiannually = 6%/ 2 = 3%

Annual coupon payment (PMT) = 1000 * 6% = $60, Semiannually coupon payment = 60 / 2 = $30

Maturity (NPER) = 12 years, Semiannually = 12 * 2 = 24

Current Yield to maturity = 6.5%, Semiannually = 6.5%/2 = 3.25%

One Yield to maturity = 6.25%, Semiannually = 6.25%/2 = 3.125%

To determine the change in price of the bond we have to first find current price of bond and one year price of bond by using PV function in excel. Then we can determine the change in price of bond.

Current price of Bond
FV	1000
PMT	30
NPER	24
Yield	3.25%
Present value	958.78
Price of bond after 1 year
FV	1000
PMT	30
NPER	22
Yield	3.13%
Present value	980.33
Change in Bond price	21.55

Therefore change in price of the bond will be +21.55

Workings