## Related questions with answers

Answer the following.

An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of 1,000 dollars, and has a yield to maturity of 8.2 percent. Bond C pays an 11.5 percent annual coupon, while Bond Z is a zero coupon bond.

a. Assuming that the yield to maturity of each bond remains at 8.2 percent over the next 4 years, calculate the price of the bonds at each of the following years to maturity:

Years to Maturity | Price of Bond C | Price of Bond Z |
---|---|---|

4 | ________________ | ________________ |

3 | ________________ | ________________ |

2 | ________________ | ________________ |

1 | ________________ | ________________ |

0 | ________________ | ________________ |

b. Plot the time path of prices for each bond.

Solutions

Verified$a)$ First, we have to find out the price of bond $C$ by changing the year maturity by using the excel sheet which we denote with $P$, where the number of year maturity $(NPER)$ is $4,3,2,1,0$, Par value $(FV)$ is $\$1,000$, Coupon annual $(PMT)$ is $\$115$ and the Interest rate $(RATE)$ is $8.2\%$.

$\begin{align*} P&=-PV(RATE,NPER,PMT,FV)\\[7pt] &=-PV(8.2\%,4 ,115,1000)\\[7pt] &= \$1,108.82\\[12pt] P&=-PV(RATE,NPER,PMT,FV)\\[7pt] &=-PV(8.2\%, 3,115,1000)\\[7pt] &= \$1,084.74\\[12pt] P&=-PV(RATE,NPER,PMT,FV)\\[7pt] &=-PV(8.2\%, 2,115,1000)\\[7pt] &= \$1,058.69\\[12pt] P&=-PV(RATE,NPER,PMT,FV)\\[7pt] &=-PV(8.2\%, 1,115,1000)\\[7pt] &= \$1,030.50\\[12pt] P&=-PV(RATE,NPER,PMT,FV)\\[7pt] &=-PV(8.2\%, 0,115,1000)\\[7pt] &= \$1,000\\[12pt] \end{align*}$

Therefore, the bond $C$ price at year maturity $4,3,2,1,0$ are $\boxed{\$1108.82, \$1084.74, \$1,058.69, \$1,030.50, \$1000}$

In this exercise, we are asked to compute for the value of Bond C and Bond Z respectively, and to plot the computed bond price over the years to maturity of the bond

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