Question

Use financial calculator

Bond A has the following terms:

• Coupon rate of interest (paid annually): 8 percent
• Principal: $1,000
• Term to maturity: Ten years

Bond B has the following terms:

• Coupon rate of interest (paid annually): 4 percent
• Principal: $1,000
• Term to maturity: Ten years

1. What should be the price of each bond if interest rate is 8 percent? Round your answers to the nearest dollar.
   Price of bond A: $  
   Price of bond B: $  

2. What will be the price of each bond if, after five years have elapsed, interest rate is 8 percent? Round your answers to the nearest dollar.
   Price of bond A: $  
   Price of bond B: $  

3. What will be the price of each bond if, after ten years have elapsed, interest rate is 7 percent? . Round your answers to the nearest dollar.
   Price of bond A: $  
   Price of bond B: $  

Answer 1

a]

Bond A

I/Y = 8 (market interest rate)

N = 10 (years remaining until maturity)

PMT = -80 (annual coupon payment = face value * coupon rate = $1,000 * 8% = $80)

FV = -1000

CPT ---> PV

PV is calculated to be $1,000

Bond B

I/Y = 8 (market interest rate)

N = 10 (years remaining until maturity)

PMT = -40 (annual coupon payment = face value * coupon rate = $1,000 * 4% = $40)

FV = -1000

CPT ---> PV

PV is calculated to be $732

b]

Bond A

I/Y = 8 (market interest rate)

N = 5 (years remaining until maturity)

PMT = -80 (annual coupon payment = face value * coupon rate = $1,000 * 8% = $80)

FV = -1000

CPT ---> PV

PV is calculated to be $1,000

Bond B

I/Y = 8 (market interest rate)

N = 5 (years remaining until maturity)

PMT = -40 (annual coupon payment = face value * coupon rate = $1,000 * 4% = $40)

FV = -1000

CPT ---> PV

PV is calculated to be $840

c]

Bond A

I/Y = 7 (market interest rate)

N = 0 (years remaining until maturity)

PMT = -80 (annual coupon payment = face value * coupon rate = $1,000 * 8% = $80)

FV = -1000

CPT ---> PV

PV is calculated to be $1,000

Bond B

I/Y = 7 (market interest rate)

N = 0 (years remaining until maturity)

PMT = -40 (annual coupon payment = face value * coupon rate = $1,000 * 4% = $40)

FV = -1000

CPT ---> PV

PV is calculated to be $1,000