Bond X is a premium bond making semiannual payments. The bond pays a 11 percent
ID: 2651350 • Letter: B
Question
Bond X is a premium bond making semiannual payments. The bond pays a 11 percent coupon, has a YTM of 9 percent, and has 17 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a 9 percent coupon, has a YTM of 11 percent, and also has 17 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 nine years? In fourteen years? In 14 years? In 17 years? (Round your answers to 2 decimal places. (e.g., 32.16))
What is the price of each bond today? (Round your answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
a. Price of Bond X = 55 x PVAF(4.5%, 34periods) + 1,000 x PVF(4.5%, 34periods) = $1,172.47
Price of Bond Y = 45 x PVAF(5.5%, 34periods) + 1,000 x PVF(5.5%, 34periods) = $847.63
Note: For the value of PVF and PVAF refer PVF and PVAF table respectively.
b. One Year
Price of Bond X = 55 x PVAF(4.5%, 32periods) + 1,000 x PVF(4.5%, 32periods) = $1,167.89
Price of Bond Y = 45 x PVAF(5.5%, 32periods) + 1,000 x PVF(5.5%, 32periods) = $850.96
Nine Years
Price of Bond X = 55 x PVAF(4.5%, 16periods) + 1,000 x PVF(4.5%, 16periods) = $1,112.34
Price of Bond Y = 45 x PVAF(5.5%, 16periods) + 1,000 x PVF(5.5%, 16periods) = $895.38
Fourteen Years
Price of Bond X = 55 x PVAF(4.5%, 6periods) + 1,000 x PVF(4.5%, 6periods) = $1,051.58
Price of Bond Y = 45 x PVAF(5.5%, 6periods) + 1,000 x PVF(5.5%, 6periods) = $950.05
Seventeen Years
Price of Bond X = Price of Bond Y = $1,000. This is due to the fact that at the maturity date of the Bond, its Price is equal to its Par Value.