Question

Approaches An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a

yield to maturity equal to 6.5%. One bond, Bond C, has a 10% coupon (paid semiannually); the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond remains at 6.5% over the next 4 years, what will be the price of each of the bonds at the following time periods? Fill in the following table: (Assume semiannual compounding.)

Answer 1

Value of bond = PV of CFs from it.

Bond C:

Period	CF	PVF @3.25%	Disc CF
1	$      50.00	0.9685	$      48.43
2	$      50.00	0.9380	$      46.90
3	$      50.00	0.9085	$      45.43
4	$      50.00	0.8799	$      44.00
5	$      50.00	0.8522	$      42.61
6	$      50.00	0.8254	$      41.27
7	$      50.00	0.7994	$      39.97
8	$      50.00	0.7742	$      38.71
8	$ 1,000.00	0.7742	$    774.25
Value of Bond	$ 1,121.56

Bond Z:

= Maturity Value * PVF(r%, n)

= $ 1000 * PVF ( 3.25% , 8 )

= $ 1000 * 0.7742

= $ 774.25

Pls comment, if any further assistance is required.