Fixed Income Question

[keep_running]

With 2 years to maturity a 8% annual coupon bonds is priced at 98.24 and yield s 9%
Last year, the same bond was priced at 95.03 to yield 10%.
Change in price due to change in maturity is amounts to:
Not sure why the answer would be $1.50. This is the correct answer if you look at the question from adjusting the maturity when to the current day when the bond was yielding 10%, only moving the maturity up to the current period from last year. However, a different answer is produced if we decided the move the maturity back one period from the present day, holding the 9% yield constant, but moving the maturity back one period.
As such, how come the answer is different if we use two different adjustments, and why should we use the first adjustment over the second adjustment?

 

[konrad1]

where did you find this question? i’ll try to look it up and see if i have a good explanation for it.

 

[breadmaker]

You have to use the “going rate” of 10% when trying to decompose the change in value between 95.03 and 98.24. The bond price at 2 years prior to maturity assuming a 10% discount rate is 96.53, so the change in value from holding the bond for 1 year with no change in interest rate is $1.5.
The second factor affecting the change in price is the decrease in the discount rate from 10% to 9%. The increase attributable to this is 98.24 - 96.53 = 1.71.

 

[konrad1]

breadmaker wrote:
You have to use the “going rate” of 10% when trying to decompose the change in value between 95.03 and 98.24. The bond price at 2 years prior to maturity assuming a 10% discount rate is 96.53, so the change in value from holding the bond for 1 year with no change in interest rate is $1.5.
The second factor affecting the change in price is the decrease in the discount rate from 10% to 9%. The increase attributable to this is 98.24 - 96.53 = 1.71.

So if the question asked what is the change in price that comes from the change in yield. The answer would be (total change - change in price due to maturity) in other words 3.21 - 1.50 = 1.71 ?

 

[S2000magician]

Yes.