What is the value today of the following two bonds? Which of the two bonds has a greater value today – bond A or B? (10 points) Bond A:                                                                                  Par Value: $1,200 Coupon Rate = 10% paid annually Yield to Maturity = 5% Maturity = 4 Years Bond B: Par Value: $1,600 Coupon Rate = $110 paid annually Yield to Maturity = 3

Bond A

no of periods = 4 years

Coupon per period = (Coupon rate / No of coupon payments per year) * Par value

Coupon per period = (10% / 1) * $1200

Coupon per period = $120

Bond Price =  Coupon / (1 + YTM)^period + Par value / (1 + YTM)^period

Bond Price = $120 / (1 + 5%)¹ + $120 / (1 + 5%)² + ...+ $120 / (1 + 5%)⁴ + $1200 / (1 + 5%)⁴

Using PVIFA = ((1 - (1 + Interest rate)^{- no of periods}) / interest rate) to value coupons

Bond Price = $120 * (1 - (1 + 5%)^-4) / (5%) + $1200 / (1 + 5%)⁴

Bond Price = $1412.7570 or $1412.76

Bond B

no of periods = 6 years

Bond Price =  Coupon / (1 + YTM)^period + Par value / (1 + YTM)^period

Bond Price = $110 / (1 + 3.5%)¹ + $110 / (1 + 3.5%)² + ...+ $110 / (1 + 3.5%)⁶ + $1600 / (1 + 3.5%)⁶

Using PVIFA = ((1 - (1 + Interest rate)^{- no of periods}) / interest rate) to value coupons

Bond Price = $110 * (1 - (1 + 3.5%)^-6) / (3.5%) + $1600 / (1 + 3.5%)⁶

Bond Price = $1887.7419 or $1887.74

Bond B has greater value today