Problem 7-6. Bond valuation An investor has two bonds in his or her portfolio, B

Question

Problem 7-6. Bond valuation

An investor has two bonds in his or her portfolio, Bond C and Bond Z. Each matures in 4 years, has a face value of $1,000, and has a yield to maturity of 8.8%. Bond C pays a 11.5% annual coupon while Bond Z is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 8.8% over the next 4 years, calculate the price of the bonds at the following years to maturity and fill in the following table. Round your answers to two decimal places.

Years to Maturity Price of Bond C Price of Bond Z
4 1. 2.
3 3. 4.
2 5. 6.
1 7. 8.

Explanation / Answer

At 4 years to maturity
1. Price of bond C = 115/1.088+115/1.0882+115/1.0883+1115/1.0884 = 1087.86

2. Price of bond Z = 1000/1.0884 = 713.65

At 3 years to maturity
3. Price of bond C = 115/1.088+115/1.0882+1115/1.0883 = 1068.59

4. Price of bond Z = 1000/1.0883 = 776.45

At 2 years to maturity
5. Price of bond C = 115/1.088+1115/1.0882 = 1047.63

6. Price of bond Z = 1000/1.0882 = 844.78

At 1 years to maturity
7. Price of bond C = 1115/1.088 = 1024.82

8. Price of bond Z = 1000/1.088 = 925.93

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