Bond X is a premium bond making semiannual payments. The bond pays a coupon rate

Question

Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 8 percent, has a YTM of 6 percent, and has 12 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6 percent, has a YTM of 8 percent, and also has 12 years to maturity. The bonds have a $1,000 par value.

What is the price of each bond today? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now? In two years? In seven years? In 11 years? In 12 years? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 8 percent, has a YTM of 6 percent, and has 12 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6 percent, has a YTM of 8 percent, and also has 12 years to maturity. The bonds have a $1,000 par value.

Explanation / Answer

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

Question 1

-Price of Bond X

Current Market Price of Bonds = $1169.32 (677.42+491.90)

*PVAF = (1-(1+r)-n)/r = (1-1.03-24)/.03 = 16.9355

**PVF = 1 / (1+r)n = 1/1.03-24 = .4919

Note : Since the bond makes semiannual interest payments, total no. of period is 24 (12*2), cashflow per period is 40(1000*8%/2) and cashflows are discounted at 3% (6/2).

-Price of Bond Y

Current Market Price of Bonds = $847.51 (457.41+390.10)

*PVAF = (1-(1+r)-n)/r = (1-1.04-24) / .04= 15.247

**PVF = 1 / (1+r)n = 1 / 1.04-24 = .3901

Question 2

-BOND X

-BOND Y

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