Question

Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 12 percent, has a YTM of 10 percent, and has 12 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon of 10 percent, has a YTM of 12 percent, and also has 12 years to maturity.

What is the price of each bond today? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Price of Miller Corporation bond	$ 1137.99
Price of Modigliani Company bond	$ 874.50

If interest rates remain unchanged, what do you expect the prices of these bonds to be 1 year from now? In 3 years? In 8 years? In 10 years? In 12 years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Price of bond	Miller Corporation Bond	Modigliani Company Bond
1 year	$	$
3 years	$	$
8 years	$	$
10 years	$	$
12 years	$	$

Answer 1

Miller bond

Price in 1 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =11x2

Bond Price =∑ [(12*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^11x2

k=1

Bond Price = 1131.63

Price in 3 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =9x2

Bond Price =∑ [(12*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^9x2

k=1

Bond Price = 1116.9

Price in 8 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =4x2

Bond Price =∑ [(12*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^4x2

k=1

Bond Price = 1064.63

Price in 10 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =2x2

Bond Price =∑ [(12*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^2x2

k=1

Bond Price = 1035.46

Price in 12 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =0x2

Bond Price =∑ [(12*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^0x2

k=1

Bond Price = 1000

Modigliani bond

Price in 1 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =11x2

Bond Price =∑ [(10*1000/200)/(1 + 12/200)^k]     +   1000/(1 + 12/200)^11x2

k=1

Bond Price = 879.58

Price in 3 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =9x2

Bond Price =∑ [(10*1000/200)/(1 + 12/200)^k]     +   1000/(1 + 12/200)^9x2

k=1

Bond Price = 891.72

Price in 8 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =4x2

Bond Price =∑ [(10*1000/200)/(1 + 12/200)^k]     +   1000/(1 + 12/200)^4x2

k=1

Bond Price = 937.9

Price in 10 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =2x2

Bond Price =∑ [(10*1000/200)/(1 + 12/200)^k]     +   1000/(1 + 12/200)^2x2

k=1

Bond Price = 965.35

Price in 12 year

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =0x2

Bond Price =∑ [(10*1000/200)/(1 + 12/200)^k]     +   1000/(1 + 12/200)^0x2

k=1

Bond Price = 1000