Bond X is a premium bond making semiannual payments. The bond pays a 10 percent
ID: 2650353 • Letter: B
Question
Bond X is a premium bond making semiannual payments. The bond pays a 10 percent coupon, has a YTM of 8 percent, and has 20 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a 8 percent coupon, has a YTM of 10 percent, and also has 20 years to maturity.
What is the price of each bond today? (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 ten years? In fifteen years? In 19 years? In 20 years? (Round your answers to 2 decimal places. (e.g., 32.16))
Bond X is a premium bond making semiannual payments. The bond pays a 10 percent coupon, has a YTM of 8 percent, and has 20 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a 8 percent coupon, has a YTM of 10 percent, and also has 20 years to maturity.
Explanation / Answer
Bond Price Calculation:
Formula to Calculate Price of the Bond:
Bond Price = C x F x 1 - (1+r) -t / r + F / (1+r)t
C = Coupon Payment, F = Face Value, r = YTM, t = Time
Price of Bond X in one Year from now = 10% x 1,000 x 1 - (1 + 0.08) -19 / 0.08 + 1,000 / (1+0.08)19
Price of Bond X = $1,192.07
Price of Bond X in Ten Year from now = 10% x 1,000 x 1 - (1 + 0.08) -10 / 0.08 + 1,000 / (1+0.08)10
Price of Bond X = $1,134.20
Price of Bond X in Fifteen Year from now = 10% x 1,000 x 1 - (1 + 0.08) -15 / 0.08 + 1,000 / (1+0.08)15
Price of Bond X = $1,079.85