Exhibit 16-10
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of $1,000.
-Refer to Exhibit 16-10. Calculate the price of Bond B.

Question

Quizplus · Accepted Answer

To calculate the price of Bond B, we use the formula for the present value of a bond, which accounts for the present value of the bond's coupon payments and the present value of its face value. The coupon payment is $80 (8% of $1,000), and the yield to maturity is 9%. The calculation is as follows: Price of Bond B = ($80 / (1 + 0.09)^1) + ($80 / (1 + 0.09)^2) + ($80 / (1 + 0.09)^3) + ($1,000 / (1 + 0.09)^3) = $73.39 + $67.33 + $61.77 + $772.20 = $974.69.

Exhibit 16-10 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)