Question

An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.5%. Bond C pays a 10% annual coupon, while 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, calculate the price of the bonds at each of the following years to maturity. Round your answer to the nearest cent. Years to Maturity Price of Bond C Price of Bond Z 4 $ $ 3 2 1 0

Answer 1

Bond C

	Answer
Years to maturity	Price at ending	Interest paid	Price at beginning	Interest accured
	a	b	c=(a+b)/1.085	d=c*8.5%
0	1000	100	1,013.82	86.18
1	1,013.82	100	1,026.57	87.26
2	1,026.57	100	1,038.31	88.26
3	1,038.31	100	1,049.13	89.18
4	1,049.13	100	1,059.11	90.02

Bond Z

	Answer
Years to maturity	Price at ending	Interest paid	Price at beginning	Interest accured
	a	b	c=(a+b)/1.085	d=c*8.5%
0	1000	0	921.66	78.34
1	921.66	0	849.46	72.20
2	849.46	0	782.91	66.55
3	782.91	0	721.57	61.33
4	721.57	0	665.05	56.53