Bond valuation An investor has two bonds in her portfolio, Bond C and Bond Z. Ea
ID: 2638692 • Letter: B
Question
Bond valuation
An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.3%. Bond C pays a 11% annual coupon, while Bond Z is a zero coupon bond.
Assuming that the yield to maturity of each bond remains at 8.3% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Round your answer to the nearest cent.
Years to Maturity Price of Bond C Price of Bond Z
4
3
2
1
0
Explanation / Answer
Bond-C Coupon =0.11*1000 110 Price at Year 4 1000 Proce at Year 3=110/(1.083)+1000/(1.083) 1024.93 Price at Year 2=110/(1.083)+110/(1.083^2)+1000/(1.083^2) 1047.95 Price at Year 1=110/(1.083)+110/(1.083^2)+110/(1.083^3)+1000/(1.083^3) 1069.21 Price at Y0=110/(1.083)+110/(1.083^2)+110/(1.083^3)+110/(1.083^4)+1000/(1.083^4) 1088.83 Price of Bond-Z at Year-4=1000 10000 Price of Bond-Z at Year-3=1000/(1.083^1) 923.36 Price of Bond-Z at Year-2=1000/(1.083^2) 852.60 Price of Bond-Z at Year-1=1000/(1.083^3) 787.25 Price of Bond-Z at Year-0=1000/(1.083^4) 726.92