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 |

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