Question

Assume that five years ago you bought a 5% coupon bond that matures 10 years from today. The yield to maturity was 5% when you bought the bond; today it is 12%. Today, the price of the bond will be _______________ it was when you bought it 5 years ago.

Answer 1

Today, the price of the bond will be the same as it was when you bought it 5 years ago.

Explanation:

The increase in the coupon rate of the bond will actually take effect on the price of the bond after a year period of the change in the rate. The adverb, Today shows that this is the same day the rate was increased, thus the generation of the increment till that day will depend on the former rate. Instead of getting an increment of 6.7% than the previous price after a year, today's price will still be the same as it was five years ago.