Bond X is a premium bond making annual payments. The bond has a coupon rate of 8
ID: 2740447 • Letter: B
Question
Bond X is a premium bond making annual payments. The bond has a coupon rate of 8.7 percent, a YTM of 6.7 percent, and has 20 years to maturity. Bond Y is a discount bond making annual payments. This bond has a coupon rate of 6.7 percent, a YTM of 8.7 percent, and also has 20 years to maturity. Assume the interest rates remain unchanged.
Requirement 1:
What are the prices of these bonds today? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Requirement 2:
What do you expect the prices of these bonds to be in one year? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g.,32.16).)
What do you expect the prices of these bonds to be in three years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g.,32.16).)
Requirement 4:
What do you expect the prices of these bonds to be in eight years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g.,32.16).)
Requirement 5:
What do you expect the prices of these bonds to be in 12 years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
What do you expect the prices of these bonds to be in 20 years? (Do not round intermediate calculations.)
What are the prices of these bonds today? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Requirement 2:
What do you expect the prices of these bonds to be in one year? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g.,32.16).)
Requirement 3:What do you expect the prices of these bonds to be in three years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g.,32.16).)
Requirement 4:
What do you expect the prices of these bonds to be in eight years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g.,32.16).)
Requirement 5:
What do you expect the prices of these bonds to be in 12 years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Requirement 6:What do you expect the prices of these bonds to be in 20 years? (Do not round intermediate calculations.)
Explanation / Answer
Current Price of Bond= Present value of Annual Interest and maturity
Requirement 1-
Current Price of Bond X= (Annual Interest*Sum of PVF at YTM)+(Maturity value*PVF for year 20)
=($87*10.8455)+ ($1000*0.2733)= $1216.86
Current Price of Bond Y= ($67*9.3271)+($1000*0.1885)= $813.42
Requirement -2
Requirement -3
Requirement-4
5-
6- 20 year
Bond X Bond Y Coupon Rate 8.70% 6.70% YTM 6.70% 8.70% Term 20 year 20 year Assume Face Value $1,000.00 $1,000.00 Annual Interest $87.00 $67.00 Sum of PVF at YTM for 20 year 10.8455 9.3271 PVF for year 20 0.2733 0.1885