Question

BOND VALUATION

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 8.7%. Bond C pays a 10.5% annual coupon, while Bond Z is a zero coupon bond.

1. Assuming that the yield to maturity of each bond remains at 8.7% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Round your answer to the nearest cent.

   Years to Maturity	Price of Bond C	Price of Bond Z
   4	$	$
   3
   2
   1
   0

2. Select the correct graph based on the time path of prices for each bond.

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   The correct sketch is -Select-ABCD

Answer 1

Bond C PMT = fv x coupon rate FV = face value rate = YTM NPER (number of payments) price = pv -PV(rate,nper,pmt,fv) 1000 8.7% 105 105 8.7% 8.7% Price at t = 0 Price at t = 1 Price at t = 2 Price at t=3 Price at t = 4 Bond Z 105 105 105 1000 1000 1000 1000 $1,058.70 $1,045.81 $1,031.79 $1,016.56 $1,000.00 8.7% 8.7% PMT = fv x coupon rate FV = face value rate = YTM NPER (number of payments) price = pv -PV(rate,nper,pmt,fv) 1000 8.7% $716.28 $778.59 1000 8.7% Price at t=0 Price at t = 1 Price at t = 2 Price at t = 3 Price at t = 4 1000 8.7% $846.33 1000 8.7% $919.96 $1,000.00 1000 8.7% years to maturity price of bond c $1,058.70 $1,045.81 $1,031.79 $1,016.56 $1,000.00 price of bond z $716.28 $778.59 $846.33 $919.96 $1,000.00

Bond C Bond Price! $12001 $1,000 $800 $600 $400T $2001 Bond Z Years to Maturity