Question

Two bonds have par values of​ $1,000. One is a 5.5​%, 10​-year bond priced to yield...

Two bonds have par values of​ $1,000. One is a 5.5​%, 10​-year bond priced to yield 9.5​%. The other is​ a(n) 8.5​%, 22​-year bond priced to yield 6.5​%. What is the price, PV, of the 5.5%, 10 year bond? (Round to the nearest cent.) What is the price, PV, of the 8.5%, 22 year bond? (Round to the nearest cent.) Which of these two has the lower​ price? (Assume annual compounding in both​ case.)

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Answer #1

Solution

One bond :

Years to maturity ( nper) = 10 years

Yield to maturity ( rate) = 9.5%

Coupon rate = 5.5%

Interest ( PMT) = 1000*5.5%= $55

Future value ( FV) = $1000

Price of bond ( PV) =?

PV ( rate, nper,PMT, FV)

PV ( 9.5%,10, 55,1000)= $748.85

Price of one bond is $748.85

Other bond:

Yield to maturity (rate)= 6.5%

Coupon rate = 8.5%

Interest amount (PMT) = 1000*8.5%= $85

Years to maturity ( nper) = 22 years

Price of bond (PV) = ?

PV ( Rate, nper, PMT, FV)

PV ( 6.5%, 22,85,1000)= $1230.70

Price of other bond is $1230.70

Price of one bond having price $748.85 is low

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