Bond A is a premium bond making annual payments. The bond pays a 13 percent coup
ID: 2684355 • Letter: B
Question
Bond A is a premium bond making annual payments. The bond pays a 13 percent coupon, has a YTM of 10 percent, and has 15 years left to maturity. Bond B is a discount bond making annual payments. This bond pays a 10 percent coupon, has a YTM of 13 percent, and also has 15 years left to maturity. The bonds face value is $1,000, and assume interest rates will remain unchanged. Requirement 1: What are the prices of these bonds today? (Do not include the dollar signs ($). 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 four 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 ten 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 14 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 15 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