# Bond Q - Mistake in the Answers?

10 year 5% Treasury bond Price to yield 5.2% Three months after issuance 10 yr treasuries declined 100 bp What is the most likely price of this bond at: Issuance-------------3 months later above par ----------- above par above par-------------below par below par-------------above par below ------------------ below I put D as at issuance coupon < yield so discount and 3 months later the yield is 5.1% and so still > coupon so still discount. The answer is B but I have no idea why, i’m thinking it’s a mistake. What’s the concensus?

answer is wrong…there is a pull to par feature for bonds issued at a discount or premium, so regardless if rates hadnt changed the bond would increase in value. With rates falling 100bps…i.e. 1%, the bond should be priced at a preium to par. The correct answer is C

5.2% - 100 bps = 4.2% That being said, I don’t know why it would be “B” either. 5% yielding 5.2% is a discount; 5% yielding 4.2% is a premium

© Issuance: N=20, I=2.6%, PMT=2.5, FV=100 PV =>\$98.50 (below) 3 Mo later: N=19.5, I=2.1%, PMT=2.5, FV=100 PV => \$105.10 (above)