Bond X is a premium bond making annual payments. The bond pays an 8 percent coup
ID: 2683467 • Letter: B
Question
Bond X is a premium bond making annual payments. The bond pays an 8 percent coupon, has a YTM of 6 percent, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 6 percent coupon, has a YTM of 8 percent, and also has 13 years to maturity. Assume the interest rates remain unchanged.Requirement 1:
What are the prices of these bonds today? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Prices
Bond X $
Bond Y $
--------------------------------------------------------------------------------
Requirement 2:
What do you expect the prices of these bonds to be in one year? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Prices
Bond X $
Bond Y $
--------------------------------------------------------------------------------
Requirement 3:
What do you expect the prices of these bonds to be in three years? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Prices
Bond X $
Bond Y $
--------------------------------------------------------------------------------
Requirement 4:
What do you expect the prices of these bonds to be in eight years? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Prices
Bond X $
Bond Y $
--------------------------------------------------------------------------------
Requirement 5:
What do you expect the prices of these bonds to be in 12 years? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Prices
Bond X $
Bond Y $
--------------------------------------------------------------------------------
Requirement 6:
What do you expect the prices of these bonds to be in 13 years? (Do not include the dollar signs ($). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations.)
Prices
Bond X $
Bond Y $
--------------------------------------------------------------------------------
Explanation / Answer
Assume Face Value = 100
(1) Price of these bonds now
Bond X = (8.3/0.063)(1-1/1.06316)+100/1.06316= 119.80
Bond Y = (6.3/0.083)(1-1/1.08316)+100/1.08316= 82.63
(2) Price of these bonds in 1 years (maturity now becomes 15)
Bond X = (8.3/0.063)(1-1/1.06315)+100/1.06315= 119.05
Bond Y = (6.3/0.083)(1-1/1.08315)+100/1.08315= 83.19
(3) Price of these bonds in 3 years (maturity now becomes 13)
Bond X = (8.3/0.063)(1-1/1.06313)+100/1.06313= 117.40
Bond Y = (6.3/0.083)(1-1/1.08313)+100/1.08313= 84.45
(4) Price of these bonds in 8 years (maturity now becomes 8)
Bond X = (8.3/0.063)(1-1/1.0638)+100/1.0638= 112.27
Bond Y = (6.3/0.083)(1-1/1.0838)+100/1.0838= 88.64
(5) Price of these bonds in 12 years (maturity now becomes 4)
Bond X = (8.3/0.063)(1-1/1.0634)+100/1.0634= 106.88
Bond Y = (6.3/0.083)(1-1/1.0834)+100/1.0834= 93.42
(6) Price of these bonds in 16 years (maturity now becomes 0)
Bond X = face value + coupon = 100 + 8.3 = 108.3
Bond Y = face value + coupon = 100 + 6.3 = 106.3