Question

Bond prices and maturity dates Les Company is about to issue a bond with semiannual coupon payments, an annual Coupon rate of 10%, and a poc value of $1,000 The yield to maturity for this bond is 8% a. What is the price of the bond if it matures in 5, 10, 15, or 20 years? b. What do you notice about the price of the bond in relationship to the maturity of the bond? a. What is the price of the bond if it matures in 5 years? (Round to the nearest cent)

Answer 1

solution a:

Computation of bond price
Table values are based on:
n=	10
i=	4.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.67556	$1,000.00	$676
Interest (Annuity)	8.11090	$50.00	$406
Price of bonds			$1,081

Computation of bond price
Table values are based on:
n=	20
i=	4.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.45639	$1,000.00	$456
Interest (Annuity)	13.59033	$50.00	$680
Price of bonds			$1,136

Computation of bond price
Table values are based on:
n=	30
i=	4.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.30832	$1,000.00	$308
Interest (Annuity)	17.29203	$50.00	$865
Price of bonds			$1,173

Computation of bond price
Table values are based on:
n=	40
i=	4.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.20829	$1,000.00	$208
Interest (Annuity)	19.79277	$50.00	$990
Price of bonds			$1,198

Solution b:

Price of bonds increases as maturity of bond increases in case yield to maturity is lesser than coupon rate.