A 7.5 percent coupon bond with nine years left to maturity is priced to offer a 10.4 percent yield to maturity. You believe that in one year, the yield to maturity will be 8 percent. What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

Question

Quizplus · Accepted Answer

To calculate the change in price, we first need to find the initial and final prices of the bond. The initial price can be calculated using the formula for the present value of a bond, which takes into account the present value of the coupon payments and the present value of the par value. The final price is calculated similarly, but with the yield to maturity adjusted to 8 percent and the time to maturity reduced by one year. The difference between these two prices gives us the change in price. Given the complexity of the bond pricing formula and the need for financial calculators or software for precise calculations, the correct answer is derived from applying these principles, leading to a change in price of $137.75.

A 75 Percent Coupon Bond with Nine Years Left to Maturity