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Consider two bonds: bond XY and bond ZW . Bond XY has a face value of...

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Finance

Consider two bonds: bond XY and bond ZW . Bond XY has a facevalue of $1,000 and 10 years to maturity and has just been issuedat par. It bears the current market interest rate of 7% (i.e. thisis the yield to maturity for this bond). Bond ZW was issued 5 yearsago when interest rates were much higher. Bond ZW has face value of$1,000 and pays a 13% coupon rate. When issued, this bond had a15-year, so today its remaining maturity is 10 years. Both bondsmake annual coupon payments.

a) (5 points) What is the price of Bond ZW , given that marketinterest rates are 7%? b) (15 points) Compute the duration for bondbonds (use Excel).

Answer & Explanation Solved by verified expert
4.0 Ratings (547 Votes)
Price of the bond can be calculated by discounting the futurecash flows at the current rate of interestNote when the coupon rate than the discount ratethe price par and vice versaDuration of the two bonds are calculatedbelowBond ZWYearCFPVPV x    See Answer
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Consider two bonds: bond XY and bond ZW . Bond XY has a facevalue of $1,000 and 10 years to maturity and has just been issuedat par. It bears the current market interest rate of 7% (i.e. thisis the yield to maturity for this bond). Bond ZW was issued 5 yearsago when interest rates were much higher. Bond ZW has face value of$1,000 and pays a 13% coupon rate. When issued, this bond had a15-year, so today its remaining maturity is 10 years. Both bondsmake annual coupon payments.a) (5 points) What is the price of Bond ZW , given that marketinterest rates are 7%? b) (15 points) Compute the duration for bondbonds (use Excel).

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