Consider three bonds with 6.4% coupon rates, all selling at face value. The shor
ID: 2820986 • Letter: C
Question
Consider three bonds with 6.4% coupon rates, all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years. a. what will be the price of each bond if their yields increase to 74%? (Do not round Intermedlate calculations. Round your answers to 2 decimal places.) 4 Years 8 Years 30 Years Bond priceS b. what will be the price of each bond if their yields decrease to 5.4%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) 4 Years 8 Years 30 Years Bond priceExplanation / Answer
Face Value = $1,000
Annual Coupon Rate = 6.40%
Annual Coupon = 6.40% * $1,000
Annual Coupon = $64
Answer a.
If time to maturity is 4 years:
Bonds Price = $64 * PVIFA(7.40%, 4) + $1,000 * PVIF(7.40%, 4)
Bonds Price = $64 * (1 - (1/1.074)^4) / 0.074 + $1,000 / 1.074^4
Bonds Price = $966.43
If time to maturity is 8 years:
Bonds Price = $64 * PVIFA(7.40%, 8) + $1,000 * PVIF(7.40%, 8)
Bonds Price = $64 * (1 - (1/1.074)^8) / 0.074 + $1,000 / 1.074^8
Bonds Price = $941.20
If time to maturity is 30 years:
Bonds Price = $64 * PVIFA(7.40%, 30) + $1,000 * PVIF(7.40%, 30)
Bonds Price = $64 * (1 - (1/1.074)^30) / 0.074 + $1,000 / 1.074^30
Bonds Price = $880.74
Answer b.
If time to maturity is 4 years:
Bonds Price = $64 * PVIFA(5.40%, 4) + $1,000 * PVIF(5.40%, 4)
Bonds Price = $64 * (1 - (1/1.054)^4) / 0.054 + $1,000 / 1.054^4
Bonds Price = $1,035.13
If time to maturity is 8 years:
Bonds Price = $64 * PVIFA(5.40%, 8) + $1,000 * PVIF(5.40%, 8)
Bonds Price = $64 * (1 - (1/1.054)^8) / 0.054 + $1,000 / 1.054^8
Bonds Price = $1,063.60
If time to maturity is 30 years:
Bonds Price = $64 * PVIFA(5.40%, 30) + $1,000 * PVIF(5.40%, 30)
Bonds Price = $64 * (1 - (1/1.054)^30) / 0.054 + $1,000 / 1.054^30
Bonds Price = $1,146.96