1-year bond priced yield 6.5 %, W hof hese two Assume annua compounding in oth a
ID: 2620893 • Letter: 1
Question
1-year bond priced yield 6.5 %, W hof hese two Assume annua compounding in oth as s. Two bonds have par values o $1,000 One is a 5%, 13-year bond priced yield 8.0%. The other sa n 9%, The price, PV, of the 5%, 13-year bond is SLI (Round to the nearest cent.) The price, PV, of the 996, 21-year bond is $D (Round to the nearest cent.) Which of these two has the lower price? (Select the best answer below.) o The 9%, 21-year bond has lower price of S762 89. as the ower price O The 5%, 13-year bond has lower price of $762.89Explanation / Answer
Price of 13 years bond = Coupon * [ 1 - (1+r)-n ] / r + Face value * ( 1 +r)-n
Coupon = 1000 * 5% = 50
r = 0.08 and n = 13 years
50 * [ 1 - (1.08)-13 ] / 0.08 + 1000 * (1.08)-13 = 395.19 + 367.70 = 762.89
Price of 21 years bond = 90 * [ 1 - (1.065)-21 ] / 0.065 + 1000 * (1.065)-21 = 1015.65 + 266.48 = 1282.13
The 5% 13 year bond has lower price of 762.89
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