Question

X Module 4 Homework An investor has two bonds in her portfolo, 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 9.3%. Bond C pays a 11.5% annual coupon, while Bond Z is a zero coupon bond. a. Assuming that the yleld to maturity of each bond remains at 9.3 % over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Round your answers to the nearest cent Years to Maturity Price of Bond C Price of Bond Z 4 3 2 s s 0 b. Select the correct graph based on the time path of prices for each bond. A Bond Price $1200 Bond C $1.000 $800 $600 Bosd Z $400 $200

Answer 1

| Α Bond z $1,000 1 2 Par Value 3 Coupon Rate 4 YTM Bond C $1,000 11.50% 9.30% 9.30% 6 Years to Maturity Price of Bond C Price of Bond Z $1,070.81 $700.68 $1,055.39 $765.84 $1,038.54 $837.07 $1,020.13 $914.91 $1,000.00 $1,000.00 NN w 12

А Bond C Bond z 1000 1000 0.115 0.093 0.093 2 Par Value 3 Coupon Rate 4 YTM 5 Years to Maturity 74 83 9 2 10 1 11 0 Price of Bond C =-PV(B$4,$A7,B$3*B$2,B$2) --PV(B$4,$A8,B$3*B$2,B$2) --PV(B$4,$A9,B$3*B$2,B$2) =-PV(B$4,$A10,B$3*B$2,B$2) =-PV(B$4,$A11,B$3*B$2,B$2) Price of Bond Z --PV(C$4,$A7,C$3*C$2,C$2) --PV(C$4,$A8,C$3*C$2,c$2) --PV(C$4,$A9,C$3*C$2,C$2) --PV(C$4,$A10,C$3*C$2,C$2) --PV(C$4,$A11,C$3*C$2,C$2) 12

For graph, we should look at two characteristics to identify the correct answer - first, price of bond C is higher than price of bond Z when years to maturity is 4. And second, when the bond matures, both bonds have $1000 as price, which implies the bond prices should coincide in graph.

So, these characteristics match with graph A