Final answer:
If the yield remains unchanged, the bond price will decrease. The new bond price one year hence would be $1,120.
Step-by-step explanation:
When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value. Conversely, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value. In this case, the bond has a coupon rate of 8% and a yield of 6%. If the yield remains unchanged, the bond price will decrease. To calculate the bond price one year hence, we need to determine the new yield. Given that the bond has a five-year maturity and one year has already passed, four years are remaining.
To calculate the new yield, we can use the formula (Interest/Price) * 100. Using the current yield of 6% and four years remaining, we can calculate: (Interest/Price) * 100 = (8% / Price) * 100 = 6%.
Solving for Price, we find that the new bond price one year hence would be $1,120.