Question

A 20-year bond with a face value of $1,000 currently sells for $1,100. One year later, if interest rates have not changed: (you can always do the math)

	The bond’s price will still be exactly $1,100.
		The bond’s price will still be slightly more.
		The bond’s price will still be slightly less.
		The bond’s price will still be significantly more, (say $50 more).
		The bond’s price will still be significantly less, (say $50 less).

Answer 1

Given for a bond,

Face value = $1000

price = $1100

Time to maturity = 20 years

lets assume that bond pay a coupon of 5% annually, that interest rate(Yield to maturity) can be calculated using Financial calculator. Use following values in calculator,

FV = 1000

PV = -1100

PMT = 5% of 1000 = 50

N = 20

compute for I/Y we get I/Y = 4.25%

After one year,

only value that change is Time to maturity

Now, N = 19

compute for PV, we get PV = -1096.73

That means price of the bond has decreased to 1096.73

The bond’s price will still be slightly less.

So, option C is correct.