Bond P is a premium bond with an 7.2 percent coupon, a YTM of 5.95 percent, and
ID: 2722016 • Letter: B
Question
Bond P is a premium bond with an 7.2 percent coupon, a YTM of 5.95 percent, and 15 years to maturity. Bond D is a discount bond with an 7.2 percent coupon, a YTM of 8.95 percent, and also 15 years to maturity. 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 14 years? In 15 years? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.) Bond P Bond D 1 year $ $ 5 years $ $ 10 years $ $ 14 years $ $ 15 years $ $
Explanation / Answer
Present Value of bond formulae ;
= Coupon1 / (1+ R)^1 + ........................+ [ Coupon inthe last + face value ] / (1+ R)^n
Present value of bond P = 72 / (1+ 5.95%)^1 +.................... + [ 72 + 1000 ] / (1+5.95%)^15 {face value is assumed as 1000 so coupon = 1000*7.2% = $72 }
Present value = $1121.80
Future value of bond P in 1 year = 72 / (1+5.95%) ^1 + .......+ [ 72+ 1000 ] / (1+5.95% )^14 = $1116.54
Future value in 5 years = 72 /(1+5.95%)^1 +...........+[72+1000] / (1+5.95%)^10 = $1092.21
Future value in 10 years = 72 / (1+5.95%)^1 +.............+ [72+1000] / (1+5.95%)^5 = $1052. 72
Future value in 14 years = 72 / (1+5.95%) ^1 + .............+ [72 +1000] /(1+5.95)^1 = $1011.79
Vaue of bond in 15 years = $1000 (as in the last year face value is paid )
Bond D calculations are as under ;
Value of bond in 1 year = 72 / (1+8.95%)^1 +..............+ [72+1000 ] / (1+ 8.95%)^14 = $863.35
Value in 5 years = 72 / (1+8.95%)^1 +.................+ [72+1000 ] / (1+8.95%) ^10 = $887.44
Value in 10 years = 72 / (1+8.95%) ^1+ .............+ [72 +1000] /(1+8.95)^5 = $931. 84
Value in 14 years = 72 / (1+8.95%)^1 + ................+ [ 72+1000] /(1+8.95%)^1 = $983.93
Value in 15 years = $1000