You can invest in two bonds. Bond A is a t-year bond with semiannual coupons, wh

Question

You can invest in two bonds. Bond A is a t-year bond with semiannual coupons, while Bond B is a zero-coupon bond redeemable in t/2 years. The desired semiannual yield rate is the same for both bonds. You also have the following information

: Bond A

• Par value is £1000.

•The ratio of the semiannual bond rate to the desired semiannual yield rate, r i , is 1.03125.

• The present value of the redemption value is £381.50.

Bond B

• Redemption value is the same as the redemption value of bond A.

• Price is £647.80.

Find the redemption value and the price of bond A.

Explanation / Answer

Please provide feedback.... Thanks in advance.. :-)

Let X be redumption value of bond A = Redumption value of bond B For Bond A Base value is 1000 x 1.03125 = 1.031.25 Pv of redumption value of Bond A = X/(1+r)^2t i.e. 381.50 = x/(1+r)^2t Price of Bond B = X/(1+r)^t (Half of bond A time) 647.8 = X/(1+r)^t

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