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Bond Value as Maturity Approaches An investor has two bonds in his portfolio. Each bond matures...

Bond Value as Maturity Approaches

An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 8.4%. One bond, Bond C, pays an annual coupon of 11%; the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 8.4% over the next 4 years, what will be the price of each of the bonds at the following time periods? Assume time 0 is today. Fill in the following table. Round your answers to the nearest cent.

t Price of Bond C Price of Bond Z
0 $   $  
1
2
3
4

Solutions

Expert Solution

Current Bond price
C Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =4
Bond Price =∑ [(11*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^4
                   k=1
Bond Price = 1085.35
Z Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =4
Bond Price =∑ [(0*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^4
                   k=1
Bond Price = 724.24
Price in 1 year
C Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =3
Bond Price =∑ [(11*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^3
                   k=1
Bond Price = 1066.52
Z Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =3
Bond Price =∑ [(0*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^3
                   k=1
Bond Price = 785.08
Price in 2 year
C Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =2
Bond Price =∑ [(11*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^2
                   k=1
Bond Price = 1046.11
Z Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =2
Bond Price =∑ [(0*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^2
                   k=1
Bond Price = 851.02
Price in 3 year
C Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =1
Bond Price =∑ [(11*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^1
                   k=1
Bond Price = 1023.99
Z Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =1
Bond Price =∑ [(0*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^1
                   k=1
Bond Price = 922.51
Price in 4 year
C Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =0
Bond Price =∑ [(11*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^0
                   k=1
Bond Price = 1000
Z Bond
                  K = N
Bond Price =∑ [( Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =0
Bond Price =∑ [(0*1000/100)/(1 + 8.4/100)^k]     +   1000/(1 + 8.4/100)^0
                   k=1
Bond Price = 1000

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