Question

A 30-year Treasury bond is issued with face value of $1,000, paying interest of $60 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond’s: (LO6-1) a. coupon rate? b. price? c. yield to maturity? d. currentyield?

Answer 1

a. No change

b. Increase in price

c. Yield to maturity increases

d. No change

Step-by-step explanation:

a. There is no effect to the coupon rate with change in the market yield.

b. As the yield increase the price of the bond decrease because the present value factor in calculation of Bond's price. Higher yield rate results in lower price and lower yield comes with higher price.

c. Yield to maturity increases as the price of the bond decreases.

d. Current yield will increase as market price is decrease and current yield is the ratio of annual coupon payment to current market price.