Consider the following problem involving three bonds that pay coupons annually. All three bonds h...
Consider the following problem involving three bonds that pay
coupons annually. All three bonds have face values of $1,000. Bond
A pays annual coupons of $100, and is worth $1,075. Bond B pays
annual coupons of $50, and is worth $985. The term structure of
interest rates is not flat.
2. What is the value of Bond C, if it pays annual coupons of
$150?
Homework Answers
From Bond A:
PV of 100+PV of 1000=1075
=>PV of 1000=1075-PV of 100
From Bond B:
PV of 50+PV of 1000=985
PV of 50=985-PV of 1000
PV of 50=985-(1075-PV of 100)
=>PV of 50-PV of 100=-90
=>PV of 100-PV of 50=90
PV of 100=2*PV of 50
So, PV of 50=90
PV of 100=2*PV of 50=2*90=180
PV of 1000=1075-180=895
Bond C Price=PV of 150+PV of 1000=3*PV of 50+PV of
1000=3*90+895=$1,165.00
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