Question

7. An annual-pay, 4% coupon, 10-year bond has a yield to maturity of 5.2%. If the price of this bond is unchanged two years later, its yield to maturity at that time is: * A. 5.2%. B. less than 5.2%. C. greater than 5.2%. D. Cannot be determined. O E. None of the above.

Answer 1

Whenever Coupon is greater than yield, then price of the bond is greater than face value of the bond

Whenever Coupon is less than yield, then price of bond is less than face value of the bond

Whenever coupon = Yield, Then price of bond = Face value of the bond

It is given that Coupon = 4% paid annually, Yield = 5.2%, and tenure is 10 years, By this we can say that price of the bond is less than Face Value of the bond.

and it is given that after two years, that means after paying two coupons, the price is not changed, that means price is greater than the price calculated under yield of 5.2%after two years, that means iyield is less than that of 5.2% because price should decrease after 2 years using same yield rate, but in this case it is same, that means yield has gone down than 5.2%.

Hence option B that is less than 5.2% is the correct answer.