Question

Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 10 percent, has a YTM of 8 percent, and has 14 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 8 percent, has a YTM of 10 percent, and also has 14 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 13 years? In 14 years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Answer 1

We will use the excel PV function to compute the prices.

To compute the prices after x years, we will only modify the term, All else remains constant

	Bond X	Bond Y
Par value	1000	1000
Annual Coupon	100	80
YTM	8.000%	10%
Term	14	14
Price today	1166.63	851.02
Price after 1 year	1159.83	856.25
After 4 years	1135.90	875.38
After 9 years	1081.11	922.78
After 13 years	1018.86	981.41
After 14 years	1000.00	1000.00

WORKINGS