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Question

Answers without step by step calculations will not be awarded points.

A company has 2 bonds outstanding. The first matures after 5 years and has a coupon rate of 8.25%. The second matures after 10 years and has a coupon rate of 8.25%. Interest rates are currently 10%. What is the present price of each $1,000 bond? Why are these prices different?

The second matures after 10 years and has a coupon rate of 8.25%. Interest rates are currently 10%. What is the present price of each $1,000 bond? Why are these prices different?

Explanation / Answer

Coupon payments = 8.25%*1000 = $82.5 5 year bond Price = 82.5/1.1+ 82.5/1.1^2....1082.5/1.1^5 = $933.66 10 year bond Price = 82.5/1.1+ 82.5/1.1^2....1082.5/1.1^5 = $892.47 The prices are different because of difference in maturity. The second bond has longer maturity and lower price

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