Question

Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 8 percent, has a YTM of 6 percent, and has 18 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6 percent, has a YTM of 8 percent, and also has 18 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 eight years? In 13 years? In 17 years? In 18 years?

Answer 1

Price of bond	Bond X	Bond Y
Today	$                                       1,218.32	$                                           810.92
	=PV(6%/2,36,80/2,1000)*-1	=PV(8%/2,36,60/2,1000)*-1
1 year	$                                       1,211.32	$                                           815.89
	=PV(6%/2,34,80/2,1000)*-1	=PV(8%/2,34,60/2,1000)*-1
8 years	$                                       1,148.77	$                                           864.10
	=PV(6%/2,20,80/2,1000)*-1	=PV(8%/2,20,60/2,1000)*-1
13 years	$                                       1,085.30	$                                           918.89
	=PV(6%/2,10,80/2,1000)*-1	=PV(8%/2,10,60/2,1000)*-1
17 years	$                                       1,019.13	$                                           981.14
	=PV(6%/2,2,80/2,1000)*-1	=PV(8%/2,2,60/2,1000)*-1
18 years	$                                       1,000.00	$                                       1,000.00
	=PV(6%/2,0,80/2,1000)*-1	=PV(8%/2,0,60/2,1000)*-1