Question

Calculate (showing your work) the price of the following 2-year
bonds when the yields on similar assets are 4 percent and the bonds have $100
face values and annual coupons of:
(a) 3 percent;
(b) 4 percent;
(c) 5 percent.

Answer 1

Answer a.

Face Value of Bond = $100
Annual Coupon = 3%*$100 = $3
Annual Yield = 4%
Time to Maturity = 2 years

Price of Bonds = $3 / 1.04 + $3 / 1.04^2 + $100 / 1.04^2
Price of Bonds = $98.11

Answer b.

Face Value of Bond = $100
Annual Coupon = 4%*$100 = $4
Annual Yield = 4%
Time to Maturity = 2 years

Price of Bonds = $4 / 1.04 + $4 / 1.04^2 + $100 / 1.04^2
Price of Bonds = $100.00

Answer c.

Face Value of Bond = $100
Annual Coupon = 5%*$100 = $5
Annual Yield = 4%
Time to Maturity = 2 years

Price of Bonds = $5 / 1.04 + $5 / 1.04^2 + $100 / 1.04^2
Price of Bonds = $101.89