In: Finance
Sweden Corp has a premium bond making semiannual payments. The bond pays a coupon of 8%, has a YTM of 6 Percent, and has 20 years to maturity. The Johnson Co. has a discount bond making semiannual payments. The bond pays a coupon of 6 percent, has a YTM of 8 percent, and also has 20 years to maturity. Both bonds has a par value of $1000. Interest Rates remain unchanged.
Sweden Corp |
Johnson Corp |
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Price Today |
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1 year |
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6 years |
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12 years |
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17 years |
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20 years |
Sweden Corp
Coupon =8%*1000/2 =40
YTM =6%/2 =3%
Par Value =1000
Price today =PV of cash flows +PV of Par value
=40*((1-(1+3%)^-40)/3%)+1000/(1+3%)^40 =1231.15
Price 1 year =PV of cash flows +PV of Par value
=40*((1-(1+3%)^-38)/3%)+1000/(1+3%)^38 =1224.92
Price 6 year =PV of cash flows +PV of Par value
=40*((1-(1+3%)^-28)/3%)+1000/(1+3%)^28 =1187.64
Price 12 year =PV of cash flows +PV of Par value
=40*((1-(1+3%)^-16)/3%)+1000/(1+3%)^16 =1125.61
Price 17 years =PV of cash flows +PV of Par value
=40*((1-(1+3%)^-6)/3%)+1000/(1+3%)^6 =1054.17
Price 20 years =PV of cash flows +PV of Par value
=40*((1-(1+3%)^0)/3%)+1000/(1+3%)^0 =1000.00
Johnson Corp
Coupon =6%*1000/2 =30
YTM =8%/2 =4%
Par Value =1000
Price today =PV of cash flows +PV of Par value
=30*((1-(1+4%)^-40)/4%)+1000/(1+4%)^40 =802.07
Price 1 year =PV of cash flows +PV of Par value
=30*((1-(1+4%)^-38)/4%)+1000/(1+4%)^38 =806.32
Price 6 year =PV of cash flows +PV of Par value
=30*((1-(1+4%)^-28)/4%)+1000/(1+4%)^28=833.37
Price 12 year =PV of cash flows +PV of Par value
=30*((1-(1+4%)^-16)/4%)+1000/(1+4%)^16=883.48
Price 17 years =PV of cash flows +PV of Par value
=30*((1-(1+4%)^-6)/4%)+1000/(1+4%)^6=947.58
Price 20 years =PV of cash flows +PV of Par value
=30*((1-(1+4%)^-0)/4%)+1000/(1+4%)^0 =1000.00