Problem 7-6 Bond valuation An investor has two bonds in her portfolio, Bond C an
ID: 2739059 • Letter: P
Question
Problem 7-6 Bond valuation An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.6%. Bond C pays a 11% annual coupon, while Bond Z is a zero coupon bond. a.Assuming that the yield to maturity of each bond remains at 8.6% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Round your answer to the nearest cent. Years to Maturity Price of Bond C Price of Bond Z 4 $ $ 3 $ $ 2 $ $ 1 $ $ 0 $ $ b.Plot the time path of prices for each bond.
Explanation / Answer
Price of the Bond-C Year-1 Cash inflow PV@8.6% PV 1 110 0.9208 101.29 2 110 0.8479 93.27 3 110 0.7807 85.88 4 110 0.7189 79.08 4 1,000 0.7189 718.92 440 1,078.44 Price of the Bond-Z Year-1 Cash inflow PV@8.6% PV 1 - 0.9208 - 2 - 0.8479 - 3 - 0.7807 - 4 - 0.7189 - 4 1,000 0.7189 718.92 - 718.92