Question

Input

Rate Convention 1=EAR, 0=APR	0
Annual Coupon Rate(CR)	7.00%
Yield to Maturity(Annualized)(YTM)	4.00%
Number of Payments/ Year (NOP)	4
Face Value(PAR)	$1,000

OutPut

Discount Rate / Period(RATE)	Fill
Coupon Payment (PMT)	Fill

Dynamic Chart Outputs

Time to Maturity (Years)	1	2	3	4	5	6	7	8
Number of Periods to Maturity
Bond Price of Coupon Bond
Bond Price of Par Bond

A) The following questions relate to the coupon and par bond describe above.Explain Each Answer

(b) Is the bond price of this coupon bond ever below the price of the par bond? Explain your answer                                                                  

(c.) What happens to the price of this coupon bond as time to maturity declines? Explain you Answer.                                                               

(d) What is the bond price of a coupon bond maturing in 8 quarters?

(e) Now assume that the yield to maturity is 9% instead, all else remaining the same, how would the price                                                                                 

of this coupon bond change as time maturity decreases? Would it increase, decrease or remain the same as                                                                             

the bond approaches maturity?   

Answer 1

Discount rate /period (RATE)= YTM/ Frequency = 4%/4=1%

Coupon payment= Face Value*Coupon Rate/Frequency= $1,000*7%/4 = $17.50

Number of periods and Price of coupon bond for different terms to maturity as follows:

Par bond is the bond which sells at its face value. Hence price of the par bond is $1,000 all along.

Question (b):

Price of the coupon bond never falls below the price of a par bond. Because, the YTM is less than coupon rate. Hence the coupon bond is at a premium, as long as the YTM remains higher than the coupon rate. On the other hand, price of the par bond is equal to face value.

Question (c):

As time to maturity declines, price of a coupon bond at premium declines gradually. Price is the present value of future cash flows, discounted at the YTM per period. When time to maturity declines, the difference between absolute amount of cash flows and their discounted value gets reduced. The bond price will eventually become equal to face value on the date of maturity.

Question (d):

Price of a coupon bond maturing in 8 quarters= $1,057.39

Question (e):

If YTM is increased to 9%, premium will be still higher. However, price will decrease as the bond approaches maturity and will be equal to face value on the date of maturity.