Question

A $1,000 bond has a coupon of 9 percent and matures after eight years. Assume that the bond pays interest annually.

1. What would be the bond's price if comparable debt yields 10 percent? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar.

   $  

2. What would be the price if comparable debt yields 10 percent and the bond matures after four years? Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar.

   $  

3. Why are the prices different in a and b?
   The price of the bond in a is ______(less or greater) than the price of the bond in b as the principal payment of the bond in a is _____(further out or closer) than the principal payment of the bond in b (in time).

4. What are the current yields and the yields to maturity in a and b? Round your answers to two decimal places.

   The bond matures after eight years:

   CY:   %
   YTM:   %

   The bond matures after four years:

   CY:   %
   YTM:   %

Appendix B

$Appendix_B.jpg$

Appendix D

$Appendix_D.jpg$

Answer 1

a. Price of the bond = $ 1,000 x 9 % x 5.335 + $ 1,000 x 0.467 = $ 947.15

b. Price of the bond = $ 1,000 x 9 % x 3.170 + $ 1,000 x 0.683 = $ 968.30

c. The price of the bond in a is less than the price of the bond in b as the principal payment of the bond in a is further out than the principal payment of the bond in b.

d. The bond matures in 8 years.

CY = Annual Coupon / Current Market Price = $ 90 / $ 947.15 * 100 = 9.50 %

The bond matures in 4 years.

CY = Annual Coupon / Current Market Price = $ 90 / $ 968.30 * 100 = 9.29 %