Question

# An analyst is evaluating two bonds, Bond Q and Bond P. The effective maturity of both...

An analyst is evaluating two bonds, Bond Q and Bond P. The effective maturity of both bonds is 4 years. The face value of both bonds is \$1000 and the yield to maturity for the bonds is 8%. Bond Q is a zero coupon bond whereas Bond P pays a 10% annual coupon.
a) Assuming that the yield to maturity of each bond remains at 8% over the next 4 years, calculate the price of both bonds for every year i.e. price at n=4, price at n=3, price at n=2. Price at n= 1, and price at n=0.
b) Plot the time path of prices for each bond (on same scale/graph).

Price of bond P at time t = PV of all coupons left at time t+ PV of Face Value at time t

 Bond P Time Cash flow PV @ time 0 PV at time 1 PV at time 2 PV at time 3 Price 0 1066.2 1 100 92.6 1051.5 2 100 85.7 92.6 1035.7 3 100 79.4 85.7 92.6 1018.5 4 1100 808.5 873.2 943.1 1018.5 1000

Price of Zero-coupon bond at time t = PV of the face value at time t

 Bond Q Time Price 0 854.8 1 889.0 2 924.6 3 961.5 4 1000

Graph

We have time on the x-axis and price on the y-axis #### Earn Coins

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