Question

Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 12 percent, has a YTM of 10 percent, and has 18 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 10 percent, has a YTM of 12 percent, and also has 18 years to maturity. The bonds have a $1,000 par value. What is the price of each bond today? If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now? In 10 years? In 14 years? In 15 years? In 18 years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Price of bond Bond X Bond Y Today In one year In 10 years In 14 years In 15 years In 18 years

Answer 1

Calculate the price of the bond as follows:

C 1148 Price of the bond Bond X 1149 Today 1150 In one year 1151 In 10 years 1152 In 14 years 1153 In 15 years 1154 In 18 years Bond Y $853.79 $856.32 $1,165.47 $1,161.93 $1,108.38 $898.94 $1,064.63 $1,050.76 $1,000.00 $1,000.00 $937.90 $950.83

Formulas:

B 1148 Price of the bond Bond X Bond Y =PV (10% / 2,18*2,-1000*12% / 2, -1000) =PV(10%/2,(18-1) 2,-1000*12% /2, -1000) =PV (10% / 2 , (18-10)*2,-1000*12% /2,-1000)PV(12%/2,(18-10)*2,-1000*10%/2,-1000) |=PV(10%/2, (18-14)*2,-1000*12% /2,-1000) =PV(10% / 2, (18-15)*2,-1000* 12% / 2, -1000) PV(10%/2, (18-18)*2,-1000* 12%/2,-1000) PV(12%/2,(18-18)*2,-1000*10%/2-1000) =PV (12 % / 2,18*2,-1000*10% / 2,-1000) =PV(12% / 2. ( 18-1) 2,-1000*10%/2,-1000) 1149 Today 1150 In one year 1151 In 10 years 1152 In 14 years =PV(12%/2,(18-14)*2,-1000*10%/2,-1000) =PV(12%/2,(18-15)*2,-1000*10%/2,-1000) 1153 In 15 years 1154 In 18 years