Question

Bond X is a premium bond making semiannual payments. The bond has a coupon rate of 9.9 percent, a YTM of 7.9 percent, and has 16 years to maturity. Bond Y is a discount bond making semiannual payments. This bond has a coupon rate of 7.9 percent, a YTM of 9.9 percent, and also has 16 years to maturity. Assume the interest rates remain unchanged and both bonds have a par value of $1,000.
1. What are the prices of these bonds today? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
2. What do you expect the prices of these bonds to be in one year? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
3. What do you expect the prices of these bonds to be in three years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
4. What do you expect the prices of these bonds to be in eight years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
5. What do you expect the prices of these bonds to be in 12 years? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
6. What do you expect the prices of these bonds to be in 16 years? (Do not round intermediate calculations.)

Answer 1

Answer:

1. What are the prices of these bonds today?

Price bond X = $1,179.88

Price bond Y = $841.03

2. What do you expect the prices of these bonds to be in one year?

Price bond X = $1,173.97

Price bond Y = $845.40

3. What do you expect the prices of these bonds to be in three years?

Price bond X = $1,160.70

Price bond Y = $855.50

4. What do you expect the prices of these bonds to be in eight years?

Price bond X = $1,116.95

Price bond Y = $891.24

5. What do you expect the prices of these bonds to be in 12 years?

Price bond X = $1,067.47

Price bond Y = $935.24

6. What do you expect the prices of these bonds to be in 16 years?

Price bond X = $1,049

Price bond Y = $1,039

I solved this using an Excel spreadsheet and the NPV function.

Download pdf