Question

Bond A and B both pay annual coupons, mature in nine years, have a face value of thousand dollar, pay their next couponin 12 months, and have the same yield to maturity. Bond a has a coupon rate of 6.5 percent and is priced at $1055.13. bond B has a coupon rate of 7.4 percent. what is the price of bond B?

Answer #1

Given about 2 bonds A and B,

Years to maturity = 9 years

face value = $1000

both have same yield to maturity

Bond A's coupon rate = 6.5%

So, annual coupon payment of bond A = 6.5% of 1000

price = $1055.13

So, Yield to maturity can be calculated on financial calculator using following values:

FV = 1000

PV = -1055.13

PMT = 65

N = 9

compute for I/Y, we get I/Y = 5.70%

So yield to maturity of Bond A is 5.70%

Since yield to maturity of both the bonds are same, Yield to maturity of bond B is also 5.70%

Coupon rate of bond B is 7.4%

So, annual coupon payment = 7.4% of 1000

Price of the bond B can be calculated on financial calculator using following values:

FV = 1000

PMT = 74

N = 9

I/Y = 5.7

compute for PV, we get PV = -1117.15

So price of bond B is $1117.15

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