Question

Two bonds have par values of​ $1,000. One is a 4.5​%,14​-year bond priced to yield 10.0​%.

The other is​ a(n)7.5​%,23​-year bond priced to yield 6.5​%.

Which of these two has the lower​ price? (Assume annual compounding in both​ cases.)

Answer 1

(a) 4.5%,14-year bond price to yield 10%
Price of bond = Interest * ( 1-(1+r)^-n ) / r + Redemption value * 1/(1+r)^n
Price of bond = (1000*4.5%) * (1-(1+10%)^-14)/10% + 1000*1/(1+10%)^14	594.83
(b) 7.5%,23-year bond priced to yield 6.5%
Price of bond = Interest * ( 1-(1+r)^-n ) / r + Redemption value * 1/(1+r)^n
Price of bond = (1000*7.5%) * (1-(1+6.5%)^-23)/6.5% + 1000*1/(1+6.5%)^23	1117.70
First bond has the lower price