A $1,000 bond has a coupon of 6 percent and matures after 10 years,?

Question

(a) what would be the bond price if comparable debt yields 8 percent?
(b) what would be the price if comparable debt yields 8 percent and the bond matures after five years?
(c) why are the prices different in a and b?
(d) what are the current yields and the yields to maturity in a and b?

Answer 1

a.) 864.10
b.) 918.89
c.) the bond price fluctuates to compensate for the difference between the bond's coupon and the current yield on comparable debt. Because over 10 years, the difference between an 8 coupon and a 6 coupon is greater than that difference over 5 years, we expect that the longer bond will be at a greater discount.
d.) a.) CY = 6.94%, YTM = 8%; b.) CY = 6.53% YTM = 8%