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Bond Valuation Analysis for C and Z

The document contains a bond valuation problem involving two bonds, Bond C and Bond Z, that both mature in 4 years with a face value of $1,000 and yield to maturity of 8.2%. Bond C pays an annual coupon of 11.5% while Bond Z is a zero-coupon bond. The bond prices are calculated for years 4, 3, 2, 1, and 0 remaining to maturity using the yield to maturity, coupon payments, and face value in a present value formula. The resulting bond prices are plotted in a table showing Bond C is consistently higher priced than Bond Z as it approaches maturity due to its annual coupon payments.

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NINIO B. MANIALAG
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107 views3 pages

Bond Valuation Analysis for C and Z

The document contains a bond valuation problem involving two bonds, Bond C and Bond Z, that both mature in 4 years with a face value of $1,000 and yield to maturity of 8.2%. Bond C pays an annual coupon of 11.5% while Bond Z is a zero-coupon bond. The bond prices are calculated for years 4, 3, 2, 1, and 0 remaining to maturity using the yield to maturity, coupon payments, and face value in a present value formula. The resulting bond prices are plotted in a table showing Bond C is consistently higher priced than Bond Z as it approaches maturity due to its annual coupon payments.

Uploaded by

NINIO B. MANIALAG
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIVERSITY OF THE IMMACULATE CONCEPTION

Bonifacio St., Davao City

MASTERS IN BUSINESS ADMINISTRATION


Financial Management

NINIO BIONG MANIALAG VINCENT RAY BORON, CPA, MBA


Student Professor

Problem 7-6. 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.
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:

Given:
Par value of bond (FV) = $1,000
Interest / coupon payments (INT) = $115
Market rate or yield to maturity (r) = 8.2%
Years to maturity (t) = 4,3,2,1, 0 years
Number of compounding periods per year (n) = Annually

Required: Bond price 4,3,2,1, 0 years to maturity

4 years to maturity:

VB = INT 1- (1+r/n) – (t) (n) + FV


r/n (1+r/n) (t) (n)

= $115 1- (1+0.082/1) – (4) (1) + $1,0000


0.082/1 (1+0.082/1) (4) (1)

= $115 1- 0.7296103 + $1,000


0.082 1.3705947

= $115 0.2703897 + $729.61


0.082

= $379.21 + $729.61

VB = $1,108.82 Bond C

VB = $729.61 Bond Z
For bond Z, simply remove the first term/ expression. We have $729.61
3 years to maturity:

VB = INT 1- (1+r/n) – (t) (n) + FV


r/n (1+r/n) (t) (n)

= $115 1- (1+0.082/1) – (3) (1) + $1,0000


0.082/1 (1+0.082/1) (3) (1)

= $115 1- 0.7894383 + $1,000


0.082 1.2667234

= $115 0.2105617 + $789.44


0.082

= $295.3 + $789.44

VB = $1,084.74 Bond C

VB = $789.44 Bond Z
For bond Z, simply remove the first term/ expression. We have $789.44

2 years to maturity:

VB = INT 1- (1+r/n) – (t) (n) + FV


r/n (1+r/n) (t) (n)

= $115 1- (1+0.082/1) – (2) (1) + $1,0000


0.082/1 (1+0.082/1) (2) (1)

= $115 1- 0.1458277 + $1,000


0.082 1.170724

= $115 0.1458277 + $854.17


0.082

= $204.51 + $854.17

VB = $1,058.68 Bond C

VB = $854.17 Bond Z
For bond Z, simply remove the first term/ expression. We have $854.17

1 year to maturity:

VB = INT 1- (1+r/n) – (t) (n) + FV


r/n (1+r/n) (t) (n)
= $115 1- (1+0.082/1) – (1) (1) + $1,0000
0.082/1 (1+0.082/1) (1) (1)

= $115 1- 0.9242144 + $1,000


0.082 1.082

= $115 0.0757856 + $924.21


0.082

= $106.28 + $924.21

VB = $1,030.49 Bond C

VB = $924.21 Bond Z
For bond Z, simply remove the first term/ expression. We have $924.21

No need to compute for year 0 value, since this represents the final payment for the bond - the par
value of the bond of $1,000 (for both C and Z).

Plot the bond prices:


Price
Years to Maturity
Bond C Bond Z
4 $1,108.82 $729.61
3 $1,084.74 $789.44
2 $1,058.69 $854.17
1 $1,030.49 $924.21
0 $1,000.00 $1,000.00

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