Victoria bond is a premium bond with 8% coupon. Houston bond is a 4 % coupon bon
ID: 2697546 • Letter: V
Question
Victoria bond is a premium bond with 8% coupon. Houston bond is a 4 % coupon bond currently selling at a discount. Both bonds make annual payments and have a yield to maturity (YTM) of 6%, and have 5 years till maturity.a. Estimate their prices (Bond prices).
b. If interest rates remain unchanged by next year, estimate their prices a year from now
Victoria bond is a premium bond with 8% coupon. Houston bond is a 4 % coupon bond currently selling at a discount. Both bonds make annual payments and have a yield to maturity (YTM) of 6%, and have 5 years till maturity.
a. Estimate their prices (Bond prices).
b. If interest rates remain unchanged by next year, estimate their prices a year from now
Explanation / Answer
a) Using a financial calculator: Victoria: n=5 (5years), i=6 (yield=6%), PMT=80 (receive 80 per year), Future Value=1000 (receive 1000 at the end) compute Present Value.... $1084.25 (price) Houston: n=5, i=6, PMT=40, FV=1000, compute PV..... $915.75 b) New n... now n=4 Victoria: n=4, i=6, PMT=80 FV=1000 compute PV....$1069.30 Houston: n=4, i=6, PMT=40, FV=1000 compute PV.... $930.70 Keep in mind that a standard bond has $1,000 face value. Also, the PV will be negative because it is money that you are paying out. The other numbers are positive because it is money you are receiving.
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