fixed income

prateekbande
Posts: 4
Joined: Wed Aug 29, 2012 8:06 pm

fixed income

Postby prateekbande » Wed Sep 05, 2012 10:37 am

Consider a bond that pays an annual coupon of 5% and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6%. If the term structure of interest rates does not change over the next twelve-month interval, the bond's price change (as a percentage of par) will be closest to:

A) 0.84.
B) -0.84.
C) 0.00.

the ans given was o.84.
actually i understood that ans cannot 0.00 because it is selling at discount but how they have calculated this value i could not understand kindly help me through this.

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: fixed income

Postby content.pristine » Mon Sep 10, 2012 5:21 pm

Hi Prateek,

I think you have understood that the Bond is trading at a discount.
Due to the Pull to Par concept, (LOS 57.d) the bond's price will decrease.
This is because, the discount amount of the bond will amortize over time.
With this information itself, you know that the answer to the question is positive.

If you would like to calculate this, figure. First Step is find the price of the bond, using the TVM keys on your calculator with 3 years left to maturity. The next step is find the price of the bond with 2 years left to maturity. This would give you the change in value..

Hope this helps
8-)


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