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 8.3%. 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 8.3% 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 to ta to ta to ta to ta to ta b. Select the correct graph based on the time path of prices for each bond. Bond Bond Price $1200 $1.0001 $800 $600 $400 T $200 Bond Z Years to Maturity

Answer 1

Α. 2 Par Value 3 Yield to Maturity 4 Coupon Rate B Bond C $1,000 8.30% 11.50% Bond z $1,000 8.30% 0% 7 Years to Maturity Price of Bond C Price of Bond Z $1,105.28 $726.92 $1,082.02 $787.25 $1,056.83 $852.60 $1,029.55 $923.36 $1,000.00 $1,000.00

B Bond C Bond z 1 2 Par Value 3 Yield to Maturity 4 Coupon Rate 1000 0.083 0.115 1000 0.083 6 Years to Maturity 7 8 4 93 10 2 11 1 12 0 13 Price of Bond C =-PV(B$3,$A8,B$4*B$2,B$2) =-PV(B$3,$A9,B$4*B$2,B$2) =-PV(B$3,$A10,B$4*B$2,B$2) =-PV(B$3,$A11,B$4*B$2,B$2) --PV(B$3,5A12,B$4*B$2,B$2) Price of Bond Z --PV(C$3,$A8,C$4*C$2,C$2) =-PV(C$3,$A9,C$4*C$2,C$2) =-PV(C$3,$A10,C$4*C$2,C$2) --PV(C$3,$A11,C$4*C$2,C$2) --PV(C$3.5A12,C$4*C$2.C$2)

There are two characterstics of graph that you should check to identify the correct one. First of all, price today (when there are 4 years to maturity) is greater for Bond C. Second, both bonds would have $1000 (or would intersect) at maturity.

This option is there only in case of GRAPH C