A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 6%. Which of the following statements is CORRECT?

a.

The bond is currently selling at a price below its par value.

b.

If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.

c.

The bond should currently be selling at its par value.

d.

If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.

e.

If market interest rates decline, the price of the bond will also decline.

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TomShelby TomShelby · Answer 1 · 2019-10-27T00:33:15+02:00

Answer:

b. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.

Explanation:

The bond coupon rate is 8%

As the YTM is 6% this means the bond is selling above par value in order to decrease the yield.

The price of the bond is compose of the future value of the coupon payment and the maturity.

As time passes, there will less coupon payment and the discount on the maturity will decrease too.

This make the market price get closer to the face value because, at maturity the bond will be worth 1,000 which is the maturity cost.

Considering the bond trades above par, it's value will decline over the past of years to match the par value.