Question

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 9.1%. Bond C pays a 11.5% annual coupon, while Bond Z is a zero coupon bond. a. Assuming that the yield to maturity of each bond remains at 9.1% 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 At 2 $ 1 $ $ 0 $ time path of prices each bond. b. Select the correct graph based on А Bond Price $1.200 Bond Z $1.000 $800 $600 Bond C $400 $200 2 Years to Maturity

Answer 1

Price of a coupon bond can be calculated using financial calculator

N = number of periods = 4 , 3,2,1,0

I/Y = Yield to maturity = 9.1%

PMT = Coupon payments = 1000*11.5% = 115

FV = future value = $1000

Compute PV ( bond price)

[N = 4 ; I/Y = 9.1% ; PMT = 115 ; FV = 1000]

Price of a zero coupon bond = 1000/(1+r)^n

Where r = YTM

n = number of years to maturity

years to maturity price of bond C Price of bond Z 4 $1,077.58 $705.83 3 $1,060.64 $770.06 2 $1,042.16 $840.14 $1,022.00 $916.59 0 $1,000.00 $1,000.00 1

b)

All options are not provided only Option A is given which is incorrect. Correct graph will be as follows

Bond price 1200 Bond C 1000 800 Bond Z 600 400 200 4 3 1 years to maturity