Question

3. An investor has two bonds in his portfolio. Each bond matures in 10 years, has a face value of $1,000, and has a yield to maturity equal to 8 percent. One bond, Bond C, pays an annual coupon of 14 percent, the other bond, Bond Y, pays an annual coupon of 4 percent.

a) Assuming that the yield to maturity for each bond remains at 8 percent over the next ten years, what will be the price of each bond at each of the following time periods: t=10, t=8, t=6, t=4, t=2, t=0 (t = # of years to maturity)?

b) Plot the time path of the prices for each of the two bonds (x-axis = years to maturity; y-axis = bond value)

Answer 1

A B C E H K M а) b) 1 2 time to maturity Price of Bond C Price of Bond Y 1402.60 Chart Title 10 731.60 1344.80 770.13 4 8 1600.00 815.08 6 1277.37 1400.00 1198.73 6 4 867.51 1200.00 928.67 7 2 1107.00 1000.00 1000.00 8 0 1000.00 800.00 9 600,00 10 11 400.00 12 200.00 13 0.00 14 10 8 6 4 2 0 15 Price of Bond C Price of Bond Y 16 17

A 1 a) 2 time to maturity Price of Bond C 3 10 Price of Bond Y | -[(140*((1.08^A3)-1)/0.08)+(1000))/1.08^A3 (40*((1.08^A3)-1)/0.08)+(1000))/1.08^A3 | (140*( (1.08 A4)-1)/0.08)+(1000))/1.08 A4 ((40* ((1.08^A4)-1)/ 0.08)+(1000))/1.08^A4 | -[(140*((1.08^A5)-1)/0.08)+(1000))/1.08^A5 ((40*((1.08^A5)-1)/0.08)+(1000))/1.08^A5 | =(140* ((1.08^A6)-1)/0.08)+(1000))/1.08^A6 ((40*((1.08^A6)-1)/0.08)+(1000))/1.08 A6 | -[(140*((1.08^A7)-1)/0.08)+(1000))/1.08^A7 (40*((1.08^A7)-1)/0.08)+(1000))/1.08^A7 (140*((1.08 A8)-1)/0.08)+(1000))/1.08 A8 ((40*(1.08^A8)-1)/0.08)+(1000))/1.08^A8 4 8 5 6 6 4 7 2 8 0 9 10

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