Question

Bond P is a premium bond making semiannual payments. The bond pays a coupon rate of 7 percent, has a YTM of 5 percent, and has 13 years to maturity. Bond D is a discount bond making semiannual payments. This bond pays a coupon rate of 5 percent, has a YTM of 7 percent, and also has 13 years to maturity. The bonds have a $1,000 par value. What is the price of each bond today? If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now? In four years? In nine years? In 11 years? In 13 years?

What is the price of each bond today? If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now? In four years? In nine years? In 11 years? In 13 years?

Answer 1

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate = (Semiannual YTM of bonds = annual YTM / 2)

nper = (years remaining until maturity * 2)

pmt = (semiannual coupon payment = face value * coupon rate / 2)

fv = 1000 (face value receivable on maturity)

The PV is outputted as a negative figure. Hence, we multiply by -1.

The bond prices are calculated below :