Question

Miller Corporation has a premium bond making semiannual payments. The bond has a coupon rate of 8 percent, a YTM of 6 percent, and 12 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond has a coupon rate of 6 percent, a YTM of 8 percent, and also has 12 years to maturity. Both bonds have a par value of $1,000.

What is the price of each bond today? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

Price of Miller bond $

Price of Modigliani bond $

If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 3 years? In 7 years? In 11 years? In 12 years? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

Price of bond in:

Miller bond, Modigliani bond

1 year $

3 years $

7 years $

11 years $

12 years $

Answer 1

Semi Annual YTM =6%/2 =3%
Number of Periods =12*2 =24
Semi Annual Coupon =8%*1000/2 =40
Price of Miller =PV of Coupons+PV of Par Value =40*((1-(1+3%)^-24)/3%)+1000/(1+3%)^24 =1169.36

Semi Annual YTM =8%/2 =4%
Semi Annual Coupon =6%*1000/2 =30
Price of Modigliani =PV of Coupons+PV of Par Value =30*((1-(1+4%)^-24)/4%)+1000/(1+4%)^24 =847 .53


After 1 year , Number of Periods =11*2 =22
Price of Miller =PV of Coupons+PV of Par Value =40*((1-(1+3%)^-22)/3%)+1000/(1+3%)^22 =1159.37
Price of Modigliani =PV of Coupons+PV of Par Value =30*((1-(1+4%)^-22)/4%)+1000/(1+4%)^22 =855.49
After 3 year , Number of Periods =9*2 =18
Price of Miller =PV of Coupons+PV of Par Value =40*((1-(1+3%)^-18)/3%)+1000/(1+3%)^18 =1137.54
Price of Modigliani =PV of Coupons+PV of Par Value =30*((1-(1+4%)^-18)/4%)+1000/(1+4%)^18 =873.41
After 7 years ,Number of Periods =5*2 =10
Price of Miller =PV of Coupons+PV of Par Value =40*((1-(1+3%)^-10)/3%)+1000/(1+3%)^10=1085.30
Price of Modigliani =PV of Coupons+PV of Par Value =30*((1-(1+4%)^-10)/4%)+1000/(1+4%)^10 =918.89
After 11 years ,Number of Periods =1*2 =2
Price of Miller =PV of Coupons+PV of Par Value =40*((1-(1+3%)^-2)/3%)+1000/(1+3%)^2=1019.13
Price of Modigliani =PV of Coupons+PV of Par Value =30*((1-(1+4%)^-2)/4%)+1000/(1+4%)^2 =981.14
After 12 years ,Number of Periods =0
Price of Miller =PV of Coupons+PV of Par Value =40*((1-(1+3%)^0)/3%)+1000/(1+3%)^0=1000
Price of Modigliani =PV of Coupons+PV of Par Value =30*((1-(1+4%)^0)/4%)+1000/(1+4%)^0=1000.00