question archive Question 4) round your answer to the nearest integer (15 marks) a
Question 4) round your answer to the nearest integer (15 marks) a
Subject:FinancePrice:2.86 Bought3
Question 4) round your answer to the nearest integer (15 marks) a. Bond X, with credit rating of AAA and market price of $1050, has a face value of $1,000 and matures in 10 years. The bond makes no payments for the first six years, then pays $180 every six months over the subsequent two years, and finally pays $160 every six months over the last two years. Bond Y, with credit rating of AA and market price of $900, has a face value of $1,000 and a maturity of 10 years; it makes no coupon payments over the life of the bond. Bond Z, with credit rating of A and market price of ($800 + $100 x Y), has a yield to maturity of 3%. What is the yield to maturity of Bond X? Of bond Y? Which of the above bond seems to be overpriced?
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For Bond x,
The payment shedule is as follows: Taking semiannual period as 1
0 : 1050
13-16: 180
17-20: 160
Using Financial calculator of IRR calculation in Excel,
we get IRR = 1.6%
Therefore Yield = 1.6%*2 = 3.2%
For Bond Y ,
Let yield be i
900 = 1000/(1+i)^10
=> i = (1000/900)^0.1 -1 = 1.06%
Since the investor receives lower yied in Bond B, therefore Bond B is overpriced
