Question

You are considering the following bonds to include in your portfolio:

	Bond 1	Bond 2	Bond 3
Price	$900	$1100	$1000
Face Value	$1000	$1000	$1000
Coupon Rate	7%	10%	9%
Frequency	1	2	4
Maturity (Years)	15	20	30
Required Return	9%	8%	9%

a. Determine the highest price you would be willing to pay for each of these bonds.

b. Determine the yield to maturity and the current yield of each bond.

Answer 1

a.

highest price you would be willing to pay for bond 1

=(1000*7%)*((1-(1+9%)^(-15*1))/9%)+1000/(1+9%)^15

=838.79

highest price you would be willing to pay for bond 2

=(1000*10%/2)*((1-(1+(8%/2))^(-20*2))/(8%/2))+1000/(1+(8%/2))^(20*2)

=1197.93

highest price you would be willing to pay for bond 3

=(1000*9%/4)*((1-(1+(9%/4))^(-30*4))/(9%/4))+1000/(1+(9%/4))^(30*4)

=1000.00

b.

Current yield of Bond 1

=(1000*7%)/900

=7.78%

Current yield of Bond 2

=(1000*10%)/1100

=9.09%

Current yield of Bond 3

=(1000*9%)/1000

=9.00%

for yield to maturity, use financial calculator as follows:

bond 1

FV=1000

PV=-900

PMT=1000*7%=70

N=15

Click CPT

Click 1/Y=8.18%

bond 2

FV=1000

PV=-1100

PMT=1000*10%/2=50

N=20*2=40

Click CPT

Click 1/Y=4.4597% per semi annual

Yield to maturity=4.4597%*2=8.92%

Bond 3

FV=1000

PV=-1000

PMT=1000*9%/4=22.5

N=30*4=120

Click CPT

Click 1/Y=2.25% per semi annual

Yield to maturity=2.25%*4=9.00%

the above is answer..