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Bond Valuation

1).An investor has two bonds in his or her portfolio, Bond C and Bond Z each matures in 4 yrs, has a face value of $1,000, and has a yield to maturity of 9.6 %. Bond C pays a 10%percent annual coupon, while Bond Z is a zero coupon bond.

a. Assuming that the yield to maturity of each bond remains at 9.6% over the next 4 years, calculate the price of the bonds at the following years to maturity and fill in the following table:
Yr 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.

2).Interest rate sensitivity: An investor purchased the following 5 bonds. Each of them had an 8 % yield to maturity on the purchase day. Immediate after she purchased them, interest rate fell and each then had a new YTM of 7 percent. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table:

Price @ 8% Price 7% Percentage change
10-yr,10% annual coupon
10-year zero
5-year zero
30-year zero
$100 perpetuity

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Solution Summary

Answers 2 questions:
1) Plots the time path of prices for bonds
2) Interest rate sensitivity: calculates percentage change in price for each bond after the decline in interest rates

$2.19