Question

I have the answer, i would like to see the stpes please .thanks

7-6 BOND VALUATION Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6%. Bond C pays a 10% annual coupon, while Bond is a zero coupon bond a. Assuming that the yield to maturity of each bond remains at 9.6% over the next 4 An investor has two bonds in her portfolio, Bond C and Bond Z. years, calculate the price of the bonds at each of the following years to maturity: Years to Maturity Price of Bond C Price of Bond Z 4 b. Plot the time path of prices for each bond.

Answer 1

Ans) a) The Calculation of the price of Bonds is as follows.

FOR BOND C(Price When Maturity is 4 Years)

Years Cash Flow (A)   Discounting Factor(YTM-9.6%)(B) Discounted Cash flows

1		100	1.096	1.096		91.24088
2		100	1.096*1.096	1.201216		83.24897
3		100	1.096*1.096*1.096	1.316533		75.95709
4		100	1.096*1.096*1.096*1.096	1.44292		69.30392
4		1000	1.096*1.096*1.096*1.096	1.44292		693.0392

Sum= 1012.79  

Hence P0= 1012.79   

Similary calculating the prices(When maturity is 3,2,1,0) Years.

P1=1010.018

P2=1006.98

P3=1003.65

P4=1000

FOR BOND D(Zero coupon bond)

Years to maturity Price Discounting Factor Discounted Cash Flows

4	1000	1.096*1.096*1.096*1.096		1.44292	693.0392
3	1000	1.096*1.096*1.096		1.316533	759.5709
2	1000	1.096*1.096		1.201216	832.4897
1	1000	1.096		1.096	912.4088
0	1000	1		1	1000

Hence

P0= 693.0392

P1= 759.5709

P2= 832.4897

P3= 912.4088

P4= 1000