Question

If a 3.5% coupon trades at a yield of 6%, what will happen to the price of the bond if the yield remains constant?

• A. It will rise

• B. It will fall

• C. It will remain constant

• D. There is no way to determine what the price will do

Answer 1

Since coupon < yield, price of bond is less than its par value.

If the yield remains constant, over the period price of bond will converge towards pay value of bond.

In above case, price of bond < par value, therefore price of bond will increase to converge towards par value over the period if the yield remains constant.

Therefore, option A is correct.

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