Miller Corporation has a premium bond making semiannual payments. The bond pays
ID: 2704778 • Letter: M
Question
Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8 percent, has a YTM of 6 percent, and has 14 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon of 6 percent, has a YTM of 8 percent, and also has 14 years to maturity.
What is the price of each bond today?
If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 5 years? In 10 years? In 12 years? In 14 years?
What is the price of each bond today?
If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 5 years? In 10 years? In 12 years? In 14 years?
Explanation / Answer
Here is what you do using calculator or excel: for N periods use years *2 and coupons and yield divide by 2, for face value use 100 which is refered to as Future value. You get price $118.76 for miller and $83.337 for Modigliani today.
Repeat the same thing by changing years to maturity and get $113.75 and $ 87.34 in 5 yeras,
$107 and $ 93.267 in 10 years, $103.717 and $96.37 in 12 years (that is 2 years to maturity or 4 semiannual periods), little trick here in 14 years which is maturity the price will always be par value or 100 for each of the two bonds.
You will notice that as the time goes by and maturity approaches, premium and discount are dissapearing and the price is getting closer and closer to the face value.
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