$10,000 18. Bond Price Movements [LO2] Bond X is a premium bond making semiannua
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$10,000 18. Bond Price Movements [LO2] Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 8.5 percent, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual payments This bond pays a coupon rate of 7 percent, has a YTM of 8.5 percent, and also has 13 years to maturity. What is the price of each bond today? If interest rates remain unchanged, what do you expect the price of these bonds to be one year from now? In three years? In eight years? In 12 years? In 13 years? What's going on here? Illustrate your answers by graphing bond prices versus time to maturity Interest Rate Risk 1091 Roth pExplanation / Answer
1. The question does not provide the Face Value of Bond. So we have assumed the face vaue of bond to be USD 1000. As the price of bond and YTM has inverse relationship so as and when the YTM increase, the price of bond will decrease. Bond 1 is a premium bond therefore its Market price is higher than its face vlaue and Bond 2 is a discount bond therefore its market price is lower than its face value.
a) Assuming the Face value of bond to USD 1000, the current market price of bond 1 would be USD 1126.67 and current market price of bond 2 would be USD 883.32. The Current price is calculated with the formula {face value* (coupon rate/2)/ (1+ (YTM/2))^1)} + {face value* (coupon rate/2)/ (1+ (YTM/2))^2)}...........................................{face value* (coupon rate/2)/ (1+ (YTM/2))^26)} +{face value/ (1+ (YTM/2))^26)}.Current Maturity of bond is 13 years and coupon payment is semi annually therefore total times up to bond will be discounted is 26 (13*2)
b)
As and when time approaches to maturity, the price of bond will be equal to maturity.
Bond Price Bond1 Bond2 Year 1 1120 888 3 1106 900 8 1090 914 12 1014 985 13 1000 1000Related Questions
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