Problem 7-6 Bond valuation An investor has two bonds in her portfolio, Bond C an
ID: 2769270 • 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 8.3%. Bond C pays a 10% annual coupon, while Bond Z is a zero coupon bond.
Assuming that the yield to maturity of each bond remains at 8.3% 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 $ $
Explanation / Answer
Bond Price Calculation Years to Maturity =4 Bond C Bond Z Year PV Factor @8.3% Cash Flow Interest+Maturity PV of Cash flows Cash Flow Interest+Maturity PV of Cash flows Year 1 0.923 100 92.34 - - Year 2 0.853 100 85.26 - - Year 3 0.787 100 78.73 - - Year 4 0.727 1,100 799.61 1,000 726.92 Total $ 1,055.93 $ 726.92 Bond C Bond Z Bond Price $ 1,055.93 $ 726.92 Bond Price Calculation Years to Maturity =3 Bond C Bond Z Year PV Factor @8.3% Cash Flow Interest+Maturity PV of Cash flows Cash Flow Interest+Maturity PV of Cash flows Year 1 0.923 100 92.34 - - Year 2 0.853 100 85.26 - - Year 3 0.787 1,100 865.98 1,000 787.25 Total $ 1,043.57 $ 787.25 Bond C Bond Z Bond Price $ 1,043.57 $ 787.25 Bond Price Calculation Years to Maturity =2 Bond C Bond Z Year PV Factor @8.3% Cash Flow Interest+Maturity PV of Cash flows Cash Flow Interest+Maturity PV of Cash flows Year 1 0.923 100 92.34 - - Year 2 0.853 1,100 937.86 1,000 852.60 Total $ 1,030.19 $ 852.60 Bond C Bond Z Bond Price $ 1,030.19 $ 852.60 Bond Price Calculation Years to Maturity =1 Bond C Bond Z Year PV Factor @8.3% Cash Flow Interest+Maturity PV of Cash flows Cash Flow Interest+Maturity PV of Cash flows Year 1 0.923 1,100 1,015.70 1,000 923.36 Total $ 1,015.70 $ 923.36 Bond C Bond Z Bond Price $ 1,015.70 $ 923.36 Bond Price Calculation Years to Maturity =0 Bond C Bond Z Year PV Factor @8.3% Cash Flow Interest+Maturity PV of Cash flows Cash Flow Interest+Maturity PV of Cash flows Year 0 1.000 1,000 1,000.00 1,000 1,000.00 Total $ 1,000.00 $ 1,000.00 Bond C Bond Z Bond Price $ 1,000.00 $ 1,000.00