Consider a bond with a 10% coupon and with yield to maturity 8%. If the bond s yield to maturity

QUESTION

Consider a bond with a 10% coupon and with yield to maturity 8%. If the bonds yield to maturity remains constant, then in one year, will the bond price be higher, lower, or unchanged? Why?
The price of the bond initially is more than the face value as the YTM is less than the coupon rate of 10%. As time passes, assuming YTM remains constant, the bond price will converge to the face value of the bond. In this case,

originally, Bond price was greater than the face value. One year later, the bond price will decrease and start converging to the par value of the bond.

ANSWER:

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