Question

Bond X is a premium bond making annual payments. The bond has a coupon rate of 9 percent, a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond has a coupon rate of 7 percent, a YTM of 9 percent, and also has 13 years to maturity. Assume the interest rates remain unchanged.

Requirement 1:

What are the prices of these bonds today? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Prices
Bond X	$
Bond Y	$

Requirement 2:

What do you expect the prices of these bonds to be in one year? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Prices
Bond X	$
Bond Y	$

Requirement 3:

What do you expect the prices of these bonds to be in three years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Prices
Bond X	$
Bond Y	$

Requirement 4:

What do you expect the prices of these bonds to be in eight years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Prices
Bond X	$
Bond Y	$

Requirement 5:

What do you expect the prices of these bonds to be in 12 years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Prices
Bond X	$
Bond Y	$

Requirement 6:

What do you expect the prices of these bonds to be in 13 years? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Prices
Bond X	$
Bond Y	$

Answer 1

Requirement 1:

We can use financial calculator for calculation of bond prices with below key strokes:

Bond X

N = maturity = 13; PMT = annual coupon = $1,000*9% = $90; I/Y = YTM = 7%; FV = face value = $1,000 > CPT = compute > PV = current price of bond = $1,167.15

Face value of corporate bonds are normally $1,000.

Bond Y

N = maturity = 13; PMT = annual coupon = $1,000*7% = $70; I/Y = YTM = 9%; FV = face value = $1,000 > CPT = compute > PV = current price of bond = $850.26

Requirement 2:

in one year, remaining maturity of bonds will be 12 years.

Bond X

N = maturity = 12; PMT = annual coupon = $1,000*9% = $90; I/Y = YTM = 7%; FV = face value = $1,000 > CPT = compute > PV = current price of bond = $1,158.85

Bond Y

N = maturity = 12; PMT = annual coupon = $1,000*7% = $70; I/Y = YTM = 9%; FV = face value = $1,000 > CPT = compute > PV = current price of bond = $856.79

Requirement 3:

in three years, remaining maturity of bonds will be 10 years.

Bond X

N = maturity = 10; PMT = annual coupon = $1,000*9% = $90; I/Y = YTM = 7%; FV = face value = $1,000 > CPT = compute > PV = current price of bond = $1,140.47

Bond Y

N = maturity = 10; PMT = annual coupon = $1,000*7% = $70; I/Y = YTM = 9%; FV = face value = $1,000 > CPT = compute > PV = current price of bond = $871.65

Requirement 4:

in eight years, remaining maturity of bonds will be 5 years.

Bond X

N = maturity = 5; PMT = annual coupon = $1,000*9% = $90; I/Y = YTM = 7%; FV = face value = $1,000 > CPT = compute > PV = current price of bond = $1,082.00

Bond Y

N = maturity = 5; PMT = annual coupon = $1,000*7% = $70; I/Y = YTM = 9%; FV = face value = $1,000 > CPT = compute > PV = current price of bond = $922.21