Question

A. Bond A has the following features: Face value = $1,000, Coupon Rate = 4%, Maturity = 6 years, Yearly coupons The market interest rate is 4.05% If interest rates remain at 4.05%, what will the price of bond A be in year 1?

B.Bond B has the following features:

         Face value = $1,000,       

Coupon Rate = 4%,       

Maturity = 4 years, Yearly coupons

         The market interest rate is 5.04%

If interest rates remain at 5.04%, what is the percentage capital gain or loss on bond B if you sell the bond in year 1?

State your answer to 2 decimal places (e.g., 3.56, 0.29)

If there is a capital loss make sure to include a negative sign in your answer (e.g., -0.23)

Answer 1

Value of Bond A in a year

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 4.05%

And n is the no of Compounding periods 5 years

Coupon 4%

=

= 997.78

Bond B

value of Bond today

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 5.04%

And n is the no of Compounding periods 4 years

Coupon 4%

=

= 963.16

Value after a years

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 5.04%

And n is the no of Compounding periods 3 years

Coupon 4%

=

= 971.70

% Change 971.70 - 963.16 / 963.16 = 0.89%

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