[bigbus]

Hello. One year ago a $1,000 face value, 6% coupon bond was selling for $1,100. Since then, the market yield has decreased by two percentage points. The bond pays interest semiannually and now has four years to maturity. What is the price today? My email is [email protected]

[bigbus]

Hello.
One year ago a $1,000 face value, 6% coupon bond was selling for $1,100. Since then, the market yield has decreased by two percentage points. The bond pays interest semiannually and now has four years to maturity. What is the price today?

[ArcSine]

First figure out the prevailing market rate, one year ago. At that time, the bond had 10 remaining coupon payments, $60 each, every six months; plus a maturity payoff of $1K. Determine what discount rate would make those 11 cash flows (the last two occurring simulaneously at maturity) have a present value of $1,100.

Fast forward to today... the market yield is 2 pctg points less than what you determined in Step 1 above. The bond now has 8 remaining coupon payments, plus the maturity amount. Price the bond by discounting those cash flows at the new market rate (i.e. determine their present value), and you can call it a day.