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BOND VALUATION An investor has two bonds in her portfolio, Bond C and Bond Z. Each...

BOND VALUATION

An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.5%. Bond C pays a 10% annual coupon, while Bond Z is a zero coupon bond.

  1. Assuming that the yield to maturity of each bond remains at 9.5% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Round your answer to the nearest cent.
    Years to Maturity Price of Bond C Price of Bond Z
    4 $ $
    3
    2
    1
    0

Solutions

Expert Solution

Price of bond C for 4 years

Information provided:

Par value= future value= $1,000

Time= 4 years

Yield to maturity= 9.5%

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 4

I/Y= 9.5

PMT= 100

Press the CPT key and PV to compute the present value.

The value obtained is 1,016.02.

Therefore, the price of the bond is $1,016.02.

Price of bond C for 3 years

Information provided:

Par value= future value= $1,000

Time= 3 years

Yield to maturity= 9.5%

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 3

I/Y= 9.5

PMT= 100

Press the CPT key and PV to compute the present value.

The value obtained is 1,012.54.

Therefore, the price of the bond is $1,012.54.

Price of bond C for 2 years

Information provided:

Par value= future value= $1,000

Time= 2 years

Yield to maturity= 9.5%

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 2

I/Y= 9.5

PMT= 100

Press the CPT key and PV to compute the present value.

The value obtained is

Therefore, the price of the bond is $1,008.74.

Price of bond C for 1 year

Information provided:

Par value= future value= $1,000

Time= 1 year

Yield to maturity= 9.5%

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 1

I/Y= 9.5

PMT= 100

Press the CPT key and PV to compute the present value.

The value obtained is

Therefore, the price of the bond is $1,004.57.

Price of bond C for 0 year

Information provided:

Par value= future value= $1,000

Time= 0 year

Yield to maturity= 9.5%

Coupon rate= 10%

Coupon payment= 0.10*1,000= $100

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 0

I/Y= 9.5

PMT= 100

Press the CPT key and PV to compute the present value.

The value obtained is 1,000

Therefore, the price of the bond is $1,000.

Price of bond Z for 4 years

Information provided:

Par value= future value= $1,000

Time= 4 years

Yield to maturity= 9.5%

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 4

I/Y= 9.5

Press the CPT key and PV to compute the present value.

The value obtained is 695.57.

Therefore, the price of the bond is $695.57.

Price of bond Z for 3 years

Information provided:

Par value= future value= $1,000

Time= 3 years

Yield to maturity= 9.5%

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 3

I/Y= 9.5

Press the CPT key and PV to compute the present value.

The value obtained is 761.65

Therefore, the price of the bond is $761.65.

Price of bond Z for 2 years

Information provided:

Par value= future value= $1,000

Time= 2 years

Yield to maturity= 9.5%

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 2

I/Y= 9.5

Press the CPT key and PV to compute the present value.

The value obtained is 834.01.

Therefore, the price of the bond is $834.01.

Price of bond Z for 1 year

Information provided:

Par value= future value= $1,000

Time= 1 year

Yield to maturity= 9.5%

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 1

I/Y= 9.5

Press the CPT key and PV to compute the present value.

The value obtained is 913.24

Therefore, the price of the bond is $913.24.

Price of bond Z for 0 year

Information provided:

Par value= future value= $1,000

Time= 0 year

Yield to maturity= 9.5%

The price of the bond is computed by calculating the present value.

The below has to be entered to compute the present value:

FV= 1,000

N= 0

I/Y= 9.5

Press the CPT key and PV to compute the present value.

The value obtained is 1,000

Therefore, the price of the bond is $1,000.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago
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