Bond X is a premium bond making annual payments. The bond has a coupon rate of 9
ID: 2808456 • Letter: B
Question
Bond X is a premium bond making annual payments. The bond has a coupon rate of 9 percent, a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond has a coupon rate of 7 percent, a YTM of 9 percent, and also has 13 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 13 years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Bond X is a premium bond making annual payments. The bond has a coupon rate of 9 percent, a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond has a coupon rate of 7 percent, a YTM of 9 percent, and also has 13 years to maturity. Assume the interest rates remain unchanged.
Explanation / Answer
Assuming the par value of bond = $1,000, bond prices can be calculated using PV function on a financial calculator or excel
For Bond X, N = 13, PMT = 9% x 1000 = 90, FV = 1000, I/Y = 7% => Compute PV = $1,167.15 is the price today.
If N = 12, other things constant => PV = $1,158.85 is the price one year later and so on...
For Bond Y, N = 13, PMT = 7% x 1000 = 70, FV = 1000, I/Y = 9% => Compute PV = $850.26 is the price today.
If N = 12, other things constant => PV = $856.79 is the price one year later and so on...
Bond X Bond Y Coupon 9% 7% YTM 7% 9% Period 13 13 Price (t=0) $1,167.15 $850.26 Price (t=1) $1,158.85 $856.79 Price (t=3) $1,140.47 $871.65 Price (t=8) $1,082.00 $922.21 Price (t=12) $1,018.69 $981.65 Price (t=13) $1,000.00 $1,000.00