Question

Bond X is a premium bond making semiannual payments. The bond pays a 12 percent coupon, has a YTM of 10 percent, and has 18 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a 10 percent coupon, has a YTM of 12 percent, and also has 18 years to maturity. What is the price of each bond today? If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now? In ten years? In fifteen years? In 15 years? In 18 years?

Answer 1

Bond X

Using financial calculator BA II Plus - Input details:	Today	1-Year from now	10-Year from now	15-Year from now	18-Year from now
I/Y = R = Rate or yield / frequency of coupon in a year =	5.000000	5.000000	5.000000	5.000000	5.000000
PMT = Coupon rate x FV / frequency =	-$60.00	-$60.00	-$60.00	-$60.00	-$60.00
N = Number of years remaining x frequency =	36	34	16	6	0
FV = Future Value =	-$1,000.00	-$1,000.00	-$1,000.00	-$1,000.00	-$1,000.00
CPT > PV = Present value of bond =	$1,165.47	$1,161.93	$1,108.38	$1,050.76	$1,000.00
Formula for bond value = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N)	$1,165.47	$1,161.93	$1,108.38	$1,050.76	$1,000.00

Bond Y

Using financial calculator BA II Plus - Input details:	Today	1-Year from now	10-Year from now	15-Year from now	18-Year from now
I/Y = R = Rate or yield / frequency of coupon in a year =	6.000000	6.000000	6.000000	6.000000	6.000000
PMT = Coupon rate x FV / frequency =	-$50.00	-$50.00	-$50.00	-$50.00	-$50.00
N = Number of years remaining x frequency =	36	34	16	6	0
FV = Future Value =	-$1,000.00	-$1,000.00	-$1,000.00	-$1,000.00	-$1,000.00
CPT > PV = Present value of bond =	$853.79	$856.32	$898.94	$950.83	$1,000.00
Formula for bond value = |PMT| x ((1-((1+R%)^-N)) / R%) + (|FV|/(1+R%)^N)	$853.79	$856.32	$898.94	$950.83	$1,000.00