Question

A bond with a 6 percent coupon rate and 12 years left to maturity has a yield to maturity of 6.5 percent. If the bond has a one-year maturity, what is the change in price if the yield to maturity increases to 6.25 percent?

Answer 1

When interest rates rise, the price of bonds decreases. To calculate the change in price, use the formula (Initial price / (1 + initial YTM)) - (Initial price / (1 + new YTM)). Given the relevant values, the change in price if the YTM increases to 6.25 percent is $15.385.

Step-by-step explanation:

When interest rates rise, the price of bonds decreases. In this case, the bond has a one-year maturity and a yield to maturity (YTM) of 6.5 percent. If the YTM increases to 6.25 percent, the bond's price will decrease. To calculate the change in price, we need to use the formula:

Change in price = (Initial price / (1 + initial YTM)) - (Initial price / (1 + new YTM))

Using the given information, the initial price is $1,000, the initial YTM is 6.5 percent, and the new YTM is 6.25 percent. Plugging these values into the formula gives us:

Change in price = ($1,000 / (1 + 0.065)) - ($1,000 / (1 + 0.0625)) = $15.385

Therefore, the change in price if the YTM increases to 6.25 percent is $15.385.keywords: bond, coupon rate, yield to maturity, maturity, interest rates, price, formula