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Homework answers / question archive / 1) Which bond will have the highest price? a) 5 year, 6% Coupon, 6% Yield b) 10 year, 6% Coupon, 6% Yield c) Neither d) Cannot determine from information provided
1) Which bond will have the highest price?
a) 5 year, 6% Coupon, 6% Yield
b) 10 year, 6% Coupon, 6% Yield
c) Neither
d) Cannot determine from information provided.
2) A 6.25 percent coupon bond (par value=$1,000) with 16 years left to maturity is offered for sale at $1,015.25. Assuming interest payments are semiannual, what is the yield to maturity of the bond?
1) The correct option is c). Neither
Both the bond have equal price because the coupon rate is equal to yield to maturity.
a). We can calculate the price of bond by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of the bond
Rate = 6%
Nper = 5 periods
Pmt = coupon payment =1000*6% = 60
FV = 1000
Substituting the values in formula:
=-pv(6%,5,60,1000)
= 1000
b). We can calculate the price of bond by using the following formula in excel:-
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of the bond
Rate = 6%
Nper = 10 periods
Pmt = coupon payment =1000*6% = 60
FV = 1000
Substituting the values in formula:
=-pv(6%,10,60,1000)
= 1000
So, the price of bond is equal to face value of bond.
2) We can calculate the yield to maturity by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield to maturity (semiannual)
Nper = 16*2 = 32 periods (semiannual)
Pmt = Coupon payment = $1,000*6.25%/2 = $31.25
PV = $1,015.25
FV = $1,000
Substituting the values in formula:
= rate(32,31.25,-1015.25,1000)
= 3.05%
Yield to maturity = Rate * 2
= 3.05% * 2
= 6.10%
