Consider three bonds with 6.40% coupon rates, all making annual coupon payments
ID: 2816285 • Letter: C
Question
Consider three bonds with 6.40% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years. a. what will be the price of the 4-year bond if its yield increases to 7.40%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) 12.5 points Bond price 03:33:46 eBook Print References b, what will be the price of the 8-year bond if its yield increases to 7.40%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Bond price c. what will be the price of the 30-year bond if its yield increases to 7.40%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Bond priceExplanation / Answer
Solution-
Face value of bond =$1000
Coupon rate=6.40%
Coupon amount =6.40%*1000=$64
Yield =7.40%
Bond price at 4 years ,8 years and 30 years =???
Price of bond = coupon amount /(rate, PVAF)^t + redemption value /(rate, PVF)^t
a) Calculation of bond price (t= 4 years)
Bond price = 64/1.074,PVAF,4 years + 1000/(1.074)^4
Bond price =64*3.3568 + 1000*0.7516= $966.44
b) Calculation of bond price (t= 8 years)
Bond price = 64/1.074,PVAF, 8 years + 1000/(1.074)^8
Bond price = 64*5.8798 + 1000*0.5649= $941.21
c) Calculation of bond price (t=30 years)
Bond price = 64/1.074,PVAF,30 years + 1000/1.074^30
Bond price =64*11.9263 + 1000*0.1175= $880.78