Question

Bond A and Bond B both pay annual coupons, mature in 8 years, have a face value of $1000, pay their next coupon in 12 months, and have the same yield-to-maturity. Bond A has a coupon rate of 6.5 percent and is priced at $1,056.78. Bond B has a coupon rate of 7.4 percent. what is the price of bond B?

A. $1,113.56 (plus or minus $4)

B. $1,001.91 (plus or minus $4)

C. $1,056.78 (plus or minus $4)

D. $1,000.00 (plus or minus $4)

E. non of the above is within $4 of the correct answer

Answer 1

C. $1,056.78 (plus or minus $4)

Step-1:Yield to maturity on Bond A
Yield to maturity on Bond A	=rate(nper,pmt,pv,fv)
	= 5.60%
Where,
nper	=	Time	=	8
pmt	=	Coupon	=	$         65.00
pv	=	Current Price	=	$ -1,056.78
fv	=	Face Value	=	$   1,000.00
Step-2:Calculation of Price of bond B
Bond B's Price	=-pv(rate,nper,pmt,fv)
	= $ 1,056.78
Where,
rate	=	Discount rate	=	5.60%
nper	=	Time	=	8
pmt	=	Coupon	=	$         65.00
fv	=	Face Value	=	$   1,000.00