A 6.60 percent coupon bond with 15 years left to maturity is priced to offer a yield to maturity of 7.4 percent. You believe that in one year, the yield to maturity will be 6.9 percent. What is the change in price the bond will experience in dollars?

The price will increase by $44.67

Explanation:

Price of the bond now

Use following formula to calculate the price of the bond

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Where

F = Face value of the bond = $1,000

C = Coupon payment= $1,000 x 6.60% = $66  

n = Number of periods = 15 years

Market Rate = 7.4% annually

( Assumptions:

Face value of the bond is $1,000

Coupon payments ares made annually )

Placing values in the formula

Price of the Bond = $66 x [ ( 1 - ( 1 + 7.4% )^-15 ) / 7.4% ] + [ $1,000 / ( 1 + 7.4% )^15 ]

Price of the Bond = $928.94

Now calculate the price after one year

Where

F = Face value of the bond = $1,000

C = Coupon payment= $1,000 x 6.60% = $66  

n = Number of periods = 15 years - 1 = 14 years

Market Rate = 6.9% annually

( Assumptions:

Face value of the bond is $1,000

Coupon payments ares made annually )

Placing values in the formula

Price of the Bond = $66 x [ ( 1 - ( 1 + 6.9% )^-14 ) / 6.9% ] + [ $1,000 / ( 1 + 6.9% )^14 ]

Price of the Bond = $973.61

Change in price = $973.61 - $928.94 = $44.67

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