A 20 year, $2,000, 6% coupon rate bond will experience an 8% price increase if the yield-to-maturity drops by 1%. The price change for a comparable 8% bond would be from $900 to

Question

Quizplus · Accepted Answer

Since both bonds are comparable, they must have the same yield. Therefore, if the yield of the bond changes from 10% to 8%, the price must increase to compensate for the lower yield.

Using the bond pricing formula:

Price = (Coupon Payment / Yield) x [1 - 1 / (1 + Yield)^n] + Face Value / (1 + Yield)^n

For the original bond:

Price = ($80 / 0.10) x [1 - 1 / (1 + 0.10)^10] + $1,000 / (1 + 0.10)^10 = $900

For the new bond:

Price = ($80 / 0.08) x [1 - 1 / (1 + 0.08)^10] + $1,000 / (1 + 0.08)^10 = $945

Therefore, the price change for the comparable 8% bond would be from $900 to $945, and the answer is A.

A 20 Year, $2,000, 6% Coupon Rate Bond Will Experience