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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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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 8.2%. Bond C pays an 11.5% annual coupon, while Bond Z is a zero coupon bond.

  1. a. Assuming that the yield to maturity of each bond remains at 8.2% over the next 4 years, calculate the price of the bonds at each of the following years to maturity:
Years to Maturity Price of Bond C Price of Bond Z
4 __________ __________
3 __________ __________
2 __________ __________
1 __________ __________
0 __________ __________
  1. b. Plot the time path of prices for each bond.
  2. c.
  3. d.

(a)

Summary Introduction

To identify: Price of bonds at each of the given years to maturity.

Bond Valuation:

Bond valuation refers to the evaluation of bonds value at any point of time which can be used for decision making. Valuation of bond is done for comparison and analysis.

Explanation

Given,

Yield to maturity (YTM) is 8.2%.

Par value of bond is $1,000.

Maturity is after 4 years.

Bond C has 11.5% annual coupon.

Bond Z is a zero coupon bond.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)t+Par

(b)

Summary Introduction

To prepare: Time path of prices for each bond.

Bond Valuation:

Bond valuation refers to the evaluation of bonds value at any point of time which can be used for decision making. Valuation of bond is done for comparison and analysis.

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