Bond Pricing change, someone, interest, structure, percentage

clearlycanadian

Can someone explain this:

Consider a bond that pays an annual coupon of 5% and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6%. If the term structure of interest rates does not change over the next twelve-month interval, the bond's price change (as a percentage of par) will be closest to:

Answer:

The bond price change is computed as follows:

Bond Price Change = New Price − Old Price = (5/1.06 + 105/1.062) − (5/1.06 + 5/1.062 + 105/1.063) = 98.17 − 97.33 = 0.84.

I don't understand the logic behind the new price and the old price.

Mechanic

Is it asking for the price change between now and 12 months on?

evolsteevol

You're just discounting the coupon on the bond at 6%, and finding
the price of the bond for t=3 and t=2, and then taking the % change of the two
Its the same as saying the price is 90 with 3 ytm and 92 or whatever
with 2 ytm. 6% dis rate is consant.

Bluetick1010

Look at it this way
1ST BOND
FV=100
PMT=5
n=3
i=6
2ND BOND
Same as first except now n=2 (12 months closer to maturity)
P1=97.33
P2=98.16

Percent change in price = Change in price/P

The logic behind the price change with no change in interest rates is that as a bond gets closer to redemption its price is pulled toward par value

I think LOL