Homework SourseBOND VALUATION An investor has two bonds in her portfolio Bo
BOND VALUATION
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, and has a yield to maturity of 9.4%. Bond C pays a 12% annual coupon, while Bond Z is a zero coupon bond.
Assuming that the yield to maturity of each bond remains at 9.4% over the next 4 years, calculate the price of the bonds at each of the following years to maturity. Round your answer to the nearest cent.
Select the correct graph based on the time path of prices for each bond.
The correct sketch is -Select-ABCDItem 11 .
| Years to Maturity | Price of Bond C | Price of Bond Z |
| 4 | $ | $ |
| 3 | ||
| 2 | ||
| 1 | ||
| 0 |
Solution
Years to Maturity=4
Price of Bond C=12%*1000/1.094+12%*1000/1.094^2+12%*1000/1.094^3+(1000+12%*1000)/1.094^4=1083.498
Price of Bond Z=1000/1.094^4=698.121
Years to Maturity=3
Price of Bond C=12%*1000/1.094+12%*1000/1.094^2+(1000+12%*1000)/1.094^3=1065.347 Price of Bond Z=1000/1.094^3=763.744
Years to Maturity=2
Price of Bond C=12%*1000/1.094+(1000+12%*1000)/1.094^2=1045.49 Price of Bond Z =1000/1.094^2=835.536
Years to Maturity=1
Price of Bond C=(1000+12%*1000)/1.094^1=1023.766
Price of Bond Z=1000/1.094^1=914.076
The correct skech is B
