Bond X is a premium bond making annual payments. The bond has a coupon rate of 9
ID: 2778105 • Letter: B
Question
Bond X is a premium bond making annual payments. The bond has a coupon rate of 9.9 percent, a YTM of 7.9 percent, and has 16 years to maturity. Bond Y is a discount bond making annual payments. This bond has a coupon rate of 7.9 percent, a YTM of 9.9 percent, and also has 16 years to maturity. Assume the interest rates remain unchanged.
What are the prices of these bonds today? (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 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).)
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).)
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 16 years? (Do not round intermediate calculations.)
Requirement 1:Explanation / Answer
Formula for Price of Bond = c × F ×
1 (1 + r)-t
+
F
r
(1 + r)t
Where
C= Coupon Rate, F = Face value of Bond, r = YTM , t = time remaining for maturity
Now apply this formula for
Calculation of rice of Bind when time to mature is 16 years
Price of Bond = since face value of Bond is not goven let us assume as $1,000 ( answer will according will be adjusted)
Price of Bond X = 9.9%× 1000 ×
1 (1 + 7.9%)-16
+
1000
7.9%
(1 + 7.9%)t
Price of Bond X =$ 1,178.16
Price of Bond y = 7.9%× 1000 ×
1 (1 + 9.9%)-16
+
1000
9.9%
(1 + 9.9%)t
Price of Bond Y =$ 842.59
Prices $
X
1,178.16
Y
842.59
prices of these bonds to be in one year
here use the same formula, just change t = 15 ( since now time to mature is 15 years)
Prices $
X
1,172.2
Y
847.0
prices of these bonds to be in three year
here use the same formula, just change t = 13
Prices $
X
1,158.9
Y
857.2
prices of these bonds to be in eight year
here use the same formula, just change t = 8
Prices $
X
1,115.4
Y
892.9
prices of these bonds to be in 12 year
here use the same formula, just change t = 4
Prices $
X
1,066.4
Y
936.5
prices of these bonds to be in 16 year starting
here use the same formula, just change t = 1
Prices $
X
1,018.5
Y
981.8
Formula for Price of Bond = c × F ×
1 (1 + r)-t
+
F
r
(1 + r)t