Can someone explain this: Consider a bond that pays an annual coupon of 5% and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6%. If the term structure of interest rates does not change over the next twelve-month interval, the bond’s price change (as a percentage of par) will be closest to: Answer: The bond price change is computed as follows: Bond Price Change = New Price − Old Price = (5/1.06 + 105/1.062) − (5/1.06 + 5/1.062 + 105/1.063) = 98.17 − 97.33 = 0.84. I don’t understand the logic behind the new price and the old price.
Is it asking for the price change between now and 12 months on?
You’re just discounting the coupon on the bond at 6%, and finding the price of the bond for t=3 and t=2, and then taking the % change of the two Its the same as saying the price is 90 with 3 ytm and 92 or whatever with 2 ytm. 6% dis rate is consant.
Look at it this way 1ST BOND FV=100 PMT=5 n=3 i=6 2ND BOND Same as first except now n=2 (12 months closer to maturity) P1=97.33 P2=98.16 Percent change in price = Change in price/P The logic behind the price change with no change in interest rates is that as a bond gets closer to redemption its price is pulled toward par value I think LOL