Question

Suppose you bought a 15-year $1,000 face-value bond for $945 one year ago. The annual coupon rate is 7% and interest payments are paid annually. If the price today is $995, the yield to maturity must have changed from _____________ to ______________.
a. 8.12%; 6.94%
b. 7.12%; 8.11%
c. 7.63%; 7.06%
d. 9.11%; 9.35%
e. None of the above

Answer 1

Answer:

c. 7.63%; 7.06%

Explanation:

First we need to find the yield to maturity when we first bought the bond, the face value was 1,000 the present value was 945, the coupon payments were (0.07*1000)=70 and number of years to maturity were 15. We input the following into a financial calculator.

FV= 1,000

PV= 945

PMT= 70

N=15

Compute I= 7.63%

Now we need to find the ytm after one year of holding the bond, the future value is 1,000, the pv is 995, the number of years to maturity is 14 years and the payments are still 70,

FV= 1,000

PV=995

PMT=70

N=14

Compute I = 7.06%

The YTM changed from 7.63% to 7.06%