Question

In: Finance

1.      (2pts) Bond X is a premium bond making annual payments. The bond has a coupon...

1.      (2pts) Bond X is a premium bond making annual payments. The bond has a coupon rate of 9%, a YTM of 7%, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond has a coupon rate of 7%, a YTM of 9%, and also has 13 years to maturity. What are the prices of these bonds today? If interest rates remain unchanged, what do you expect the prices of these bonds to be in 8 years? In 13 years? What’s going on here? Illustrate your answers by graphing bond prices versus time to maturity.

Solutions

Expert Solution

Price of bond X and bond Y is calculated in excel and screen shot provided below:

Price of bond X is $1,167.15 and Bond Y is $850.26.

after 8 year, number of year remains in maturity will be 5 year. So price of both both after 8 year is calculated in excel and screen shot provided below:

After 5 year price of bond X will be $1,082 and price of bond Y will be $922.21.

Price of bond with different maturities and calculated and a graph is ploted in excel and screen shot provided below:


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