Bond X is a premium bond making semiannual payments. The bond pays a 8 percent c
ID: 2651360 • Letter: B
Question
Bond X is a premium bond making semiannual payments. The bond pays a 8 percent coupon, has a YTM of 6 percent, and has 20 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a 6 percent coupon, has a YTM of 8 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 six years? In twelve years? In 17 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 8 percent coupon, has a YTM of 6 percent, and has 20 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a 6 percent coupon, has a YTM of 8 percent, and also has 20 years to maturity.
Explanation / Answer
Answer:
1. Calculation of Price of bond X:
Using YTM Formula :
YTM = [C + {(F-P)/n} ] / {(F+P)/2}
YTM = 6% = Semiannual YTM = 0.06 /2 =0.03
C = Semiannual Coupon amount =1000*8% /2= 40
F = Face value = $1000 (Assumed)
P = Price
n= number of semiannual =20 years *2 = 40
Hence ,
0.03 = [40 + {(1000-P)/40} ] / {(1000+P)/2}
P = $1250
Hence Price of Bond X is $1250
2. Calculation of Price of bond Y:
Using YTM Formula :
YTM = [C + {(F-P)/n} ] / {(F+P)/2}
YTM = 8% = Semiannual YTM = 0.08 /2 =0.04
C = Semiannual Coupon amount =1000*6% /2= 30
F = Face value = $1000 (Assumed)
P = Price
n= number of semiannual =20 years *2 = 40
Hence ,
0.04 = [30 + {(1000-P)/40} ] / {(1000+P)/2}
P = $777.78
Hence Price of Bond Y is $777.78