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
|Time||Cash flow||PV @ time 0||PV at time 1||PV at time 2||PV at time 3||Price|
Price of Zero-coupon bond at time t = PV of the face value at time t
We have time on the x-axis and price on the y-axis
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