Bond X is a premium bond making annual payments. The bond has a coupon rate of 9
ID: 2769448 • Letter: B
Question
Bond X is a premium bond making annual payments. The bond has a coupon rate of 9.1 percent, a YTM of 7.1 percent, and has 16 years to maturity. Bond Y is a discount bond making annual payments. This bond has a coupon rate of 7.1 percent, a YTM of 9.1 percent, and also has 16 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).) 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).)es 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 16 years? (Do not round intermediate calculations.)Explanation / Answer
Answer
It is assumed that face value and redemption value of bond is $100
Bond X
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 7.1%
Present value
A
B
C
D
A+B
C*D
1
9.1
9.1
0.93
8.50
2
9.1
9.1
0.87
7.93
3
9.1
9.1
0.81
7.41
4
9.1
9.1
0.76
6.92
5
9.1
9.1
0.71
6.46
6
9.1
9.1
0.66
6.03
7
9.1
9.1
0.62
5.63
8
9.1
9.1
0.58
5.26
9
9.1
9.1
0.54
4.91
10
9.1
9.1
0.50
4.58
11
9.1
9.1
0.47
4.28
12
9.1
9.1
0.44
4.00
13
9.1
9.1
0.41
3.73
14
9.1
9.1
0.38
3.48
15
9.1
9.1
0.36
3.25
16
9.1
100
109.1
0.33
36.41
Price of Bond today
118.77
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 7.1%
Present value
A
B
C
D
A+B
C*D
1
9.1
9.1
0.93
8.50
2
9.1
9.1
0.87
7.93
3
9.1
9.1
0.81
7.41
4
9.1
9.1
0.76
6.92
5
9.1
9.1
0.71
6.46
6
9.1
9.1
0.66
6.03
7
9.1
9.1
0.62
5.63
8
9.1
9.1
0.58
5.26
9
9.1
9.1
0.54
4.91
10
9.1
9.1
0.50
4.58
11
9.1
9.1
0.47
4.28
12
9.1
9.1
0.44
4.00
13
9.1
9.1
0.41
3.73
14
9.1
9.1
0.38
3.48
15
9.1
100
109.1
0.36
38.99
Price in 1 year
118.10
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 7.1%
Present value
A
B
C
D
A+B
C*D
1
9.1
9.1
0.93
8.50
2
9.1
9.1
0.87
7.93
3
9.1
9.1
0.81
7.41
4
9.1
9.1
0.76
6.92
5
9.1
9.1
0.71
6.46
6
9.1
9.1
0.66
6.03
7
9.1
9.1
0.62
5.63
8
9.1
9.1
0.58
5.26
9
9.1
9.1
0.54
4.91
10
9.1
9.1
0.50
4.58
11
9.1
9.1
0.47
4.28
12
9.1
9.1
0.44
4.00
13
9.1
100
109.1
0.41
44.73
Price in 3 years
116.62
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 7.1%
Present value
A
B
C
D
A+B
C*D
1
9.1
9.1
0.93
8.50
2
9.1
9.1
0.87
7.93
3
9.1
9.1
0.81
7.41
4
9.1
9.1
0.76
6.92
5
9.1
9.1
0.71
6.46
6
9.1
9.1
0.66
6.03
7
9.1
9.1
0.62
5.63
8
9.1
100
109.1
0.58
63.02
Price in Year 8
111.90
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 7.1%
Present value
A
B
C
D
A+B
C*D
1
9.1
9.1
0.93
8.50
2
9.1
9.1
0.87
7.93
3
9.1
9.1
0.81
7.41
4
9.1
100
109.1
0.76
82.92
Price in 12 year
106.76
Price in Year 16 = Redemption value : $ 100
Bond Y
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 9.1%
Present value
A
B
C
D
A+B
C*D
1
7.1
7.1
0.92
6.51
2
7.1
7.1
0.84
5.96
3
7.1
7.1
0.77
5.47
4
7.1
7.1
0.71
5.01
5
7.1
7.1
0.65
4.59
6
7.1
7.1
0.59
4.21
7
7.1
7.1
0.54
3.86
8
7.1
7.1
0.50
3.54
9
7.1
7.1
0.46
3.24
10
7.1
7.1
0.42
2.97
11
7.1
7.1
0.38
2.72
12
7.1
7.1
0.35
2.50
13
7.1
7.1
0.32
2.29
14
7.1
7.1
0.30
2.10
15
7.1
7.1
0.27
1.92
16
7.1
100
107.1
0.25
26.58
Price of Bond today
83.48
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 9.1%
Present value
A
B
C
D
A+B
C*D
1
7.1
7.1
0.92
6.51
2
7.1
7.1
0.84
5.96
3
7.1
7.1
0.77
5.47
4
7.1
7.1
0.71
5.01
5
7.1
7.1
0.65
4.59
6
7.1
7.1
0.59
4.21
7
7.1
7.1
0.54
3.86
8
7.1
7.1
0.50
3.54
9
7.1
7.1
0.46
3.24
10
7.1
7.1
0.42
2.97
11
7.1
7.1
0.38
2.72
12
7.1
7.1
0.35
2.50
13
7.1
7.1
0.32
2.29
14
7.1
7.1
0.30
2.10
15
7.1
100
107.1
0.27
29.00
Price of bond 1 year
83.97
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 9.1%
Present value
A
B
C
D
A+B
C*D
1
7.1
7.1
0.92
6.51
2
7.1
7.1
0.84
5.96
3
7.1
7.1
0.77
5.47
4
7.1
7.1
0.71
5.01
5
7.1
7.1
0.65
4.59
6
7.1
7.1
0.59
4.21
7
7.1
7.1
0.54
3.86
8
7.1
7.1
0.50
3.54
9
7.1
7.1
0.46
3.24
10
7.1
7.1
0.42
2.97
11
7.1
7.1
0.38
2.72
12
7.1
7.1
0.35
2.50
13
7.1
100
107.1
0.32
34.52
Price of Bonds in 3 years
85.11
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 9.1%
Present value
A
B
C
D
A+B
C*D
1
7.1
7.1
0.92
6.51
2
7.1
7.1
0.84
5.96
3
7.1
7.1
0.77
5.47
4
7.1
7.1
0.71
5.01
5
7.1
7.1
0.65
4.59
6
7.1
7.1
0.59
4.21
7
7.1
7.1
0.54
3.86
8
7.1
100
107.1
0.50
53.36
Price in 8 years
88.97
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 9.1%
Present value
A
B
C
D
A+B
C*D
1
7.1
7.1
0.92
6.51
2
7.1
7.1
0.84
5.96
3
7.1
7.1
0.77
5.47
4
7.1
100
107.1
0.71
75.59
Price in 12 year
93.53
Price in Year 16 = Redemption value : $ 100
Figures in $
Year
Interest
Redemption Price
Cash flow
Disc Rate : 7.1%
Present value
A
B
C
D
A+B
C*D
1
9.1
9.1
0.93
8.50
2
9.1
9.1
0.87
7.93
3
9.1
9.1
0.81
7.41
4
9.1
9.1
0.76
6.92
5
9.1
9.1
0.71
6.46
6
9.1
9.1
0.66
6.03
7
9.1
9.1
0.62
5.63
8
9.1
9.1
0.58
5.26
9
9.1
9.1
0.54
4.91
10
9.1
9.1
0.50
4.58
11
9.1
9.1
0.47
4.28
12
9.1
9.1
0.44
4.00
13
9.1
9.1
0.41
3.73
14
9.1
9.1
0.38
3.48
15
9.1
9.1
0.36
3.25
16
9.1
100
109.1
0.33
36.41
Price of Bond today
118.77