Problem 10-16 Bond P is a premium bond with an 6 percent coupon, a YTM of 4.75 p

ID: 2779469 • Letter: P

Question

Problem 10-16

Bond P is a premium bond with an 6 percent coupon, a YTM of 4.75 percent, and 15 years to maturity. Bond D is a discount bond with an 6 percent coupon, a YTM of 7.75 percent, and also 15 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 5 years? In 10 years? In 14 years? In 15 years? (Input all amounts as positive values. Do not round intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Answer:

For Bond P we have:

YTM = 4.75%

Coupon rate = 6%

Assume face value = $1000

So by using PV formula on excel: =pv(rate, nper, pmt, fv)

Here rate = ytm = 4.75%

Pmt = 6% of $1000 = $60

Nper = 1 year

We have to use PV formula two times on excel

First for coupon yearly payments of $60 for a year at 4.75% discount rate which comes out to be as $57.28 and then finding out the present value of $1000 for a year at 4.75% discount rate which comes out to be as $954.65.

Therefore Value of bond = $57.28 + $954.65 = $1011.93 after a year

In the same way make the calculation for 5 , 10, 14 and 15 years.

Value of bond after 5 years = $261.57+ $792.92 = $1054.49

Value of bond after 10 years = $468.98+$628.72= $1097.7

Value of bond after 14 years = $603.53+$522.21 = $1125.74

Value of bond after 15 years = $633.44+ $498.53 = $1131.97

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Problem 10-16 Bond P is a premium bond with an 6 percent coupon, a YTM of 4.75 p

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