An investor has two bonds in his portfolio. Each bond matures in 4 years, has a
ID: 2416453 • Letter: A
Question
An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 8.5%. One bond, Bond C, pays an annual coupon of 10.5%; the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 8.5% over the next 4 years, what will be the price of each of the bonds at the following time periods? Assume time 0 is today. Fill in the following table. Round your answers to the nearest cent.
t Price of Bond C Price of Bond Z 0 $ $ 1 2 3 4Explanation / Answer
Price of a bond=Present value of coupon+ Present value of face value
Bond C
Year 0
Coupon payment =1000*10.5=$105
Discount rate=8.5%
Price of bond=105+1000=1105$
Year 1
Price of bond=105/ (1+.085) ^1 + 1000/ (1+.085)^1=1018.433
Year 2
Price of bond=105/ (1+.085) ^2 + 1000/ (1+.85)^2=938.6481
Year 3
Price of bond=105/ (1+.085) ^3 + 1000/ (1+.85)^3= 865.1134
Year 4
Price of bond=105/ (1+.085) ^4 + 1000/(1+.85)^4= 797.3396
Bond Z it does not pay any coupon hence price will be =Present value of face value
Year 0
Price=$1000
Year 1
Price=1000/(1+.085)=$921.659
Year 2
Price=1000/(1+.085)^2= 849.4553
Year 3
Price=1000/(1+.085)^3= 782.9081
Year 4
Price=1000/(1+.085)^4= 721.5743
Year
Bond C
Bond Z
0
1105
1000
1
1018.433
921.659
2
938.6481
849.4553
3
865.1134
782.9081
4
797.3396
721.5743
Year
Bond C
Bond Z
0
1105
1000
1
1018.433
921.659
2
938.6481
849.4553
3
865.1134
782.9081
4
797.3396
721.5743
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