Ashlee Inc. has a discount bond making semi-annual payments. It pays 6% coupon,

Question

Ashlee Inc. has a discount bond making semi-annual payments. It pays 6% coupon, has a YTM of 8%, and a maturity of 20 years.

Keith Inc. has a premium bond making semi-annual payments. It pays 10% coupon, has a YTM of 7%, and a maturity of 20 years. If interest rates remain unchanged, what do you expect the price of these bonds to be in:

a)      2 years from now?

b)      8 years from now?

c)       18 years from now?

d)      and at the end of their maturity?

e)       Plot your (a), (b), (c), (d), and (e) values.

Explanation / Answer

Ashlee Inc.

Price = 30*PVIFA(4,40)+(1000/1.04^40)

a) Price after 2 year = 30*PVIFA(4,36)+(1000/1.04^36) = $810.917

b) Price after 8 year = 30*PVIFA(4,24)+(1000/1.04^24) = $847.530

c) Price after 18 yeears = 30*PVIFA(4,4)+(1000/1.04^4) = $963.701

d) price at the end of maturity = $1000

e) it is an increasing plot

Keith Inc.

Price = 50*PVIFA(4,40)+(1000/1.035^40)

a) Price after 2 year = 50*PVIFA(4,36)+(1000/1.035^36) = $1304.357

b) Price after 8 year = 50*PVIFA(4,24)+(1000/1.035^24) = $1240.876

c) Price after 18 yeears = 50*PVIFA(4,4)+(1000/1.035^4) = $1055.095

d) price at the end of maturity = $1000

e) it is an decreasing plot

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.