Question

BOND VALUATION An investor has two bonds in her portfolio, Bond C and Bond Z. Each
bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9 6%.
Bond C pays a 10% annual coupon, while Bond Z is a zero coupon bond.
a. Assuming that the yield to maturity of each bond remains at 9 6% over the next 4
years, calculate the price of the bonds at each of the following years to maturity:

          

Years to Maturity                  Bond C Price                                     Bond Z Price

                        4 _____________    _____________  

                        3    _____________     _____________  

                        2    _____________     _____________

                        1     _____________    _____________  

0     _____________     _____________  

b. Plot the time path of prices for each bond.

- 7-6 BOND VALUATION An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6% Bond C pays a 10% annual coupon, while Bond Z is a zero coupon bond a. Assuming that the yield to maturity of each bond remains at 9.6% over the next 4 years, calculate the price of the bonds at each of the following years to maturity: Years to Maturity Price of Bond C Price of Bond Z b. Plot the time path of prices for each bond.

Answer 1

ANS -

The bond C & Z value has been calculated by discounting each cash flow till year 0

Bond Z is zero coupon bond , so the price is is also low because there are no cash flow except last year cash flow

Bond C face volue = $100 Coupon - 104. on face rowe - 10. X loom = $ 100 YTM = 9.6% т Чувал ,CE = 100 CF₂ = 100 CF4 = 100+ 1000 CF = 100 - llou Yen3 (end) 1003.6 → How 1.096 = 1003 6 + 10 => 1103.6 - = 1103.6 Yead (end) 1006:9 11016 Year I (end) = 1006. 9 +10 = 1100.9 / (1+0.96) - 10 10 Year o end = 1010 tlo 01.096 = 1012.19 Ans:

Bond 2 (zew Coupon Bond) YTM = 9.6% pa T 4 F: 1000 Year = 1000 (110964 L = $693.03 OR Year 3 (ena) - 1000 (11096) - 912.40 Yeard (end) 912.40 (1096) = 832.48 Year I (end) = 833.48 1.096 - 759.57 759.57 (1.096) = 693.039 PART 2 TIMELINE TINELINE 1019.79 1010 1006.9 Bond C 10036 Bonde 1087 100 100kg loob 1100 nito - Bond2 693031 75957 83348 912.40 1000