Question

In: Finance

Bonds X and Y are identical, including the risk class. The only difference between A and...

Bonds X and Y are identical, including the risk class. The only difference between A and B is in the coupon payment as shown below.

Bond X Bond Y
Face value $1,000 $1,000
Annual Coupon Payment $120 $130
Payment Frequency Semiannual Annual
Years to maturity 15 15
Price $904.55 ?


  
                What is the price of bond Y?

A.

$925.88

B.

$956.95

C.

$940.92

D.

$989.75

E.

$973.44

F.

$1,007.15

Solutions

Expert Solution

Current Price = 904.55

Coupon 12%

Maturity = 15 years

Let's assume the YTM be 13%

Value of Bond =

=

= 934.70662046

Now,

Let's assume the YTM be 14%

Value of Bond =

=

= 875.909588152

YTM =

= 13% + ((934.70662046 - 904.55) / (934.70662046 - 904.55) + (904.55 - 875.909588152 )) * (14-13)

= 13% + (30.15662046 / (30.15662046) + (28.640411875)) * 1

= 13% + (30.15662046 / 58.797032335) * 1

= 13% + 0.5129%

= 13.51%

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 13.50%

And n is the no of Compounding periods 15 years

Coupon 130

=  

= 818.860414713 + 149.64495395

= $ 973.44

Option E is correct.


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