Question

Using your own example, value the following three bonds; (i) perpetual bond, (ii) zero coupon bond whose maturity is more than 5-years (iii) a coupon paying bond whose maturity is more than 6-years. The yield rate is currently 9%pa. Generate a combined graph of the three bonds. Explain your answers and the shape of your graph. (5 Points)

Answer 1

the question is based on the concept of valuation of bond.

(i) perpetual bond,

Let coupon is 12% and face value = $100, coupon = 12%*100=12 , yield =9%

value of bond = 12/9%=133.33

(ii) zero coupon bond whose maturity is 5-years

Let face value = $100, coupon = 0, for time 6 years , yield =9%

V = 100/(1+9%)^6= 59.63

(iii) ) a coupon paying bond whose maturity is more than 6-years.

Let coupon is 12% and face value = $100, coupon = 12%*100=12 , yield =9% for 6 years

V= PV(9%,6,-12,-100) = 113.46

Graph of threebonds:

This is showing , the perpetual bonds have the highest value due to long term payment.