Question

a. A $1,000 band has a 5.5 perent coupon and matures alter eleven years. If current interest rates are 8 percent, what should be the price of the band? Assume that the bond pay terest annually. Use Appendix Band Appendix to answer the question. Round your answer to the nearest dollar b. after five years terest rates are terest annually Round you and Appendix to answer the question. Assume that the bond pas percent, what should be the price of the body Use Appendix to the nearest della Even though interest rates did not change in and b, why did the price of the bond change The price of the bond with the longer term is-Select than the price of the bond with the whorter term as the investors will collect the best interest payments and receive the principal within a longer period of time d. Change the interest rate in and to 5 percent and rework your answers, Assume that the bond pays interest annually Round your answers to the nearest dotar Price of the bond (even years to maturity): 5 Price of the bond sx years to maturity Even though the interest rate 5 percent in both why are the bond prices different than the price of the bond with the shorter the investors will collect the f o rest payments for a longer The price of the bond with the longer terms period of time

Appendix b

appendix d

Answer 1

a. price of bond = $1000/(1+0.08)^11 + $55/(1+0.08)^1 + $55/(1+0.08)^2 ....+ $55/(1+0.08)^11
= $821.53

b. price of bond with 6 years of maturity = $1000/(1+0.08)^11 + $55/(1+0.08)^1 + $55/(1+0.08)^2 ....+ $55/(1+0.08)^6

= $884.43

c. the price of the bond with the longer term is less than the the bond with the shorter term as the investor will collect the more interest payments and receive the principal within a longer period of time.

d. price of bond with 11 years with 5% interest rate = $1000/(1+0.05)^11 + $55/(1+0.05)^1 + $55/(1+0.05)^2 ....+ $55/(1+0.05)^11
= $1041.53

price of bond with 6 years with 5% interest rate = $1000/(1+0.05)^11 + $55/(1+0.05)^1 + $55/(1+0.05)^2 ....+ $55/(1+0.05)^6
= $1025.38

the price of the bond with the longer term is more than the the bond with the shorter term as the investor will collect the more interest payments and receive the principal within a longer period of time.