INV3 P1a Bond #1234 1 - year strip bond2- year strip bond2-year 6% coupon bond2-year 7% coupon bondPurchase Price for the bond)950???Year 1 cash flow100006070Year 2 cash flow0100010601070Yield to Maturity??5.50%? Fill in the missing pieces from the following table using the Law of One Price. Assume all these bonds have the same risk, the yield curve is flat, and any coupon payments are paid annually.

Use the Excel RATE function with the following inputs to determine the yield to maturity (YTM) of…

Answered: Bond # 1 2 3 4 1 - year strip…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 26P

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a. Reset the Data Section to its initial values. The price of this bond is 1,407,831. What would it be if there were only 9 or 8 years to maturity? Use the worksheet to compute the bond issue prices and enter them in the spaces provided. Bond issue price (9 years to maturity) __________________ Bond issue price (8 years to maturity) __________________ b. Compare these prices to the bond-carrying values found in the effective interest amortization schedule you originally printed out in requirement 3. Explain the similarity. c. Click the Chart sheet tab. The chart presented shows the price behavior of this bond based on years to maturity. Explain what effect years to maturity has on bond prices. Check your explanation by trying 8% as the effective rate (cell E10) and clicking the Chart sheet tab again. Also try 9%. When the assignment is complete, close the file without saving it again. Worksheet. Modify the BONDS3 worksheet to accommodate bonds with up to 20-year maturity. Use your new model to determine the issue price and amortization schedules of a 2,000,000, 18-year, 10% bond issued to yield 9%. Preview the printout to make sure that the worksheet will print neatly, and then print the worksheet. Save the completed file as BONDST. Hint: Expand both amortization schedules to 20 years. Expand the scratch pad to 20 years. Modify FORMULA1 in cell F17 to include the new ranges. Chart. Using the BONDS3 file, prepare a line chart that plots annual interest expense over the 10-year life of this bond under both the straight-line and effective interest methods. No Chart Data Table is needed. Put A23 to A32 in the Label format and then select A23 to A32, D23 to D32, and B40 to B49 as a collection. Enter all appropriate titles, legends, formats, and so forth. Enter your name somewhere on the chart. Save the file again as BONDS3. Print the chart.
Which of these two bonds offers the highest current yield? Which one has the highest yield to maturity? a. A 6.55 percent, 22-year bond quoted at 52.000 b. A 10.25 percent, 27-year bond quoted at 103.625

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Bond #	1	2	3	4
	1 - year strip bond	2- year strip bond	2-year 6% coupon bond	2-year 7% coupon bond
Purchase Price for the bond)	950	?	?	?
Year 1 cash flow	1000	0	60	70
Year 2 cash flow	0	1000	1060	1070
Yield to Maturity	?	?	5.50%	?