Question

In: Finance

Four years ago, JF Delisle purchased Procom's 15-year, 4.5% bonds at par. He notes the price...

Four years ago, JF Delisle purchased Procom's 15-year, 4.5% bonds at par. He notes the price has changed to 102.85 and he calculates the change in yield as:

A.

0.07%.

B.

0.26%.

C.

0.33%

Solutions

Expert Solution

- Face value of bond = $1000

Annual coupon Payment = $1000*4.5% = $45

When the bonds were purchased 4 years ago it was Purchased at Par which means that Market Yield(YTM) and Coupon rates were same which was 4.5%. As when Coupon rate and YTM are same Bonds are sold at Par.

YTM four years ago = 4.5%

- Now after 4 years, Price = $1000*102.85% = $1028.5

No of years to maturity = 15 years-4 years = 11 years

Calculating the Price of Bond:-

YTM after 4 years = 4.17%

So, Change in Yield(YTM) = Previous YTM - Current YTM = 4.50% - 4.17%

= 0.33%

Option C

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