Question

In: Finance

There are two bonds A and B. Both have the same maturity of 10 years. A...

There are two bonds A and B. Both have the same maturity of 10 years. A has 3% coupon rate while B offers 10% coupon rate. The current yield to maturity for both bonds is 10%.

  1. What are the bond prices?

Bond A                       Bond B

  1. If the YTM goes up to 15% for both bonds, what are the bond prices?

  1. Which bond has larger price change?

Solutions

Expert Solution

Before increase in yield to maturity:

Bond A

Information provided:

Par value= future value= $1,000

Time= 10 years

Coupon rate= 3%

Coupon payment= 0.03*1,000= $30

Yield to maturity= 10%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 10

PMT= 30

I/Y= 10

Press the CPT key and PMT to compute the present value.

The value obtained is 569.88.

Therefore, the price of the bond is $569.88.

Bond B

Information provided:

Par value= future value= $1,000

Time= 10 years

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

Yield to maturity= 10%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 10

PMT= 100

I/Y= 10

Press the CPT key and PMT to compute the present value.

The value obtained is 1,000.

Therefore, the price of the bond is $1,000.

After increase in yield to maturity:

Bond A

Information provided:

Par value= future value= $1,000

Time= 10 years

Coupon rate= 3%

Coupon payment= 0.03*1,000= $30

Yield to maturity= 15%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 10

PMT= 30

I/Y= 15

Press the CPT key and PMT to compute the present value.

The value obtained is 397.75.

Therefore, the price of the bond is $397.75.

Bond B

Information provided:

Par value= future value= $1,000

Time= 10 years

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

Yield to maturity= 15%

The price of the bond is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 10

PMT= 100

I/Y= 15

Press the CPT key and PMT to compute the present value.

The value obtained is 749.06.

Therefore, the price of the bond is $749.06.

In case of any query, kindly comment on the solution.

jeff jeffy answered 3 months ago
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