Question

Excel Online Structured Activity: 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 9.1%. Bond C pays a 10.5% annual coupon, while Bond Z is a zero coupon bond. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet Assuming that the yield to maturity of each bond remains at 9.1% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Do not round intermediate calculations. Round your answers to the nearest cent. Years to Maturity Price of Bond C Price of Bond Z 4 $ $ 3 $ $ 2 $ $ 1 $ $ 0 $ $

Answer 1

Solution

Price of a Bond = Present Value of Interest Payments or Coupon Amount + Present value of Redemption proceeds

BOND C
Year	Coupon Amount	PVIFA 9.1%, 4	PV	Redemption Value	PVIF 9.1%, 4	PV	Price of the Bond
								0	0	1.000	-	1,000.00	1.000	1,000.00	1,000.00
1	105.00	0.9166	96.24	1,000.00	0.9166	917.00	1,013.24
2	105.00	1.7567	184.45	1,000.00	0.8401	840.00	1,024.45
3	105.00	2.5268	265.31	1,000.00	0.7701	770.00	1,035.31
4	105.00	3.2326	339.42	1,000.00	0.7058	706.00	1,045.42

Value of a Zero Coupon Bond

Value = Face Value / (1+ r)ⁿ

r = Yield n = Time to maturity

BOND Z
Year	Face Value	( 1 + r)n	Price of the Bond
				0	1,000.00	-	1,000.00
1	1,000.00	1.0910	916.59
2	1,000.00	1.1903	840.14
3	1,000.00	1.2986	770.06
4	1,000.00	1.4168	705.83