Question

Consider two bonds: bond XY and bond ZW . Bond XY has a face value of $1,000 and 10 years to maturity and has just been issued at par. It bears the current market interest rate of 7% (i.e. this is the yield to maturity for this bond). Bond ZW was issued 5 years ago when interest rates were much higher. Bond ZW has face value of $1,000 and pays a 13% coupon rate. When issued, this bond had a 15-year, so today its remaining maturity is 10 years. Both bonds make annual coupon payments.

a) What is the price of Bond ZW , given that market interest rates are 7%?

b) Compute the duration for both bonds (use Excel).

Answer 1

(a) price of bond ZW. Cell no.

Face value = 1000. B149

market Interest rate (i) = 7% B150

Coupon rate = 13%. B151

Coupon Amount = 1000*13%= 130 B152

Years to maturity (n)= 10 B153

Bond price= $1,421.41

Excel function = -PV(B150,B153, B152, B149)

(b)

Settlement date today 5/25/2019 B159

Maturity date= 5/24/2029 B160

market Interest rate or yield = 7%. B161

Coupon rate = 7% B162

Coupon per year = 1. B163

Bond duration of XY 7.512454471

Bond duration of XY bond is 7.51

Settlement date today 5/25/2019

Maturity date= 5/24/2029

market Interest rate or yield = 7%

Coupon rate = 13%

Coupon per year = 1

Bond duration of ZW = 6.750760753

So Bond duration of ZW is 6.75 years

Excel function ZW which is also same for xy = =DURATION(B159, B160, B162, B161,B163)