Question

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 8.7%. Bond C pays a 11.5% annual coupon, while Bond Z is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 8.7% 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.

Answer 1

Answer:

Bond C  

Time to maturity Price of the bond

0                              $1,091.31  

1                               $1,071.26  

2                              $1,049.46

3                              $1,025.76  

4                              $1,000.00  

Bond Z

Time to maturity Price of the bond

0                              $716.28  

1                               $778.59  

2                              $846.33  

3                              $919.96  

4                              $1,000.00  

Explanation:

Bond C

Use the PV function to calcuclate the price of the bond

=PV(rate, nper, pmt, [fv] )

Where

rate = yield to maturity = 8.7%

pmt = Coupon payment = Face value x Coupon rate = $1,000 x 11.50% = $115

fv = maturity value = $1,000

Working and the formula sheet is attached with this answer, please refer to the attachment.