Bond value, interest rate changes, and return You are interested in buying a bond with a 6% coupon rate (paid annually), a maturity in six years, and a yield to maturity of 7%. Assume that par value is $1,000.
a. What is the bond’s market price?
b. Suppose you buy the bond today, hold it a year, just long enough to collect one $60 interest payment, and then sell it. When you sell it, the yield to maturity is still 7%. What price do you receive when you sell?
c. Counting both the change in price and the coupon payment that you received, what percentage return did you earn over the year?
d. Assume instead that when you are ready to sell the bond’s yield to maturity has dropped to 6%. What price do you receive and what return do you earn for the year?