Question

Miller Corporation has a premium bond making semiannual payments. The bond has a coupon rate of 11 percent, a YTM of 9 percent, and 11 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond has a coupon rate of 9 percent, a YTM of 11 percent, and also has 11 years to maturity. Both bonds have a par value of $1,000.

What is the price of each bond today? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

Price of Miller bond	$
Price of Modigliani bond	$

If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 2 years? In 6 years? In 10 years? In 11 years? (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

Price of bond in:	Miller bond		Modigliani bond
1 year	$		$
2 years	$		$
6 years	$		$
10 years	$		$
11 years	$		$

Answer 1

Current Bond price

Miller Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =11x2

Bond Price =∑ [(11*1000/200)/(1 + 9/200)^k]     +   1000/(1 + 9/200)^11x2

k=1

Bond Price = 1137.84

Modigliani Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =11x2

Bond Price =∑ [(9*1000/200)/(1 + 11/200)^k]     +   1000/(1 + 11/200)^11x2

k=1

Bond Price = 874.17

Price in 1 year

Miller Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(11*1000/200)/(1 + 9/200)^k]     +   1000/(1 + 9/200)^10x2

k=1

Bond Price = 1130.08

Modigliani Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =10x2

Bond Price =∑ [(9*1000/200)/(1 + 11/200)^k]     +   1000/(1 + 11/200)^10x2

k=1

Bond Price = 880.5

Price in 2 year

Miller Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =9x2

Bond Price =∑ [(11*1000/200)/(1 + 9/200)^k]     +   1000/(1 + 9/200)^9x2

k=1

Bond Price = 1121.6

Modigliani Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =9x2

Bond Price =∑ [(9*1000/200)/(1 + 11/200)^k]     +   1000/(1 + 11/200)^9x2

k=1

Bond Price = 887.54

Price in 6 year

Miller Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =5x2

Bond Price =∑ [(11*1000/200)/(1 + 9/200)^k]     +   1000/(1 + 9/200)^5x2

k=1

Bond Price = 1079.13

Modigliani Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =5x2

Bond Price =∑ [(9*1000/200)/(1 + 11/200)^k]     +   1000/(1 + 11/200)^5x2

k=1

Bond Price = 924.62

Price in 10 year

Miller Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =1x2

Bond Price =∑ [(11*1000/200)/(1 + 9/200)^k]     +   1000/(1 + 9/200)^1x2

k=1

Bond Price = 1018.73

Modigliani Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =1x2

Bond Price =∑ [(9*1000/200)/(1 + 11/200)^k]     +   1000/(1 + 11/200)^1x2

k=1

Bond Price = 981.54

Price in 11 year

Miller Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =0x2

Bond Price =∑ [(11*1000/200)/(1 + 9/200)^k]     +   1000/(1 + 9/200)^0x2

k=1

Bond Price = 1000

Modigliani Bond

K = Nx2

Bond Price =∑ [( Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =0x2

Bond Price =∑ [(9*1000/200)/(1 + 11/200)^k]     +   1000/(1 + 11/200)^0x2

k=1

Bond Price = 1000