Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%.If interest rates remain constant,one year from now the price of this bond will be _______.

Question

Quizplus · Accepted Answer

When the present yield to maturity is 8%, it means that the market interest rate is 8%. However, the bond offers a higher coupon rate of 10%. This makes it an attractive investment, and investors will pay a premium for it. In other words, the bond is priced higher than its face value to adjust for the 2% difference in interest rates.

One year from now, the bond will have four years left until maturity. If interest rates remain constant, the bond's yield to maturity will still be 8%. However, with only four years left until maturity, the bond's premium will decline as its price approaches its face value. This is because the premium paid for the higher coupon rate will be spread over fewer years.

As a result, the price of the bond will decrease. Therefore, the answer is B) lower.

Consider a 5-Year Bond with a 10% Coupon That Has