# Bond a and bond b both pay annual coupons mature in 8

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#10. Bond A and bond B both pay annual coupons, mature in 8 years, have a face value of \$1000, pay their next coupon in 12 months, and have the same yield-to-maturity. Bond A has a coupon rate of 6.5 percent and is priced at \$1,050.27. Bond B has a coupon rate of 7.4 percent. What is the price of bond B? A. \$1,106.83 (plus or minus \$4) B. \$995.63 (plus or minus \$4) C. \$1,050.27 (plus or minus \$4) D. \$1,000.00 (plus or minus \$4) E. None of the above is within \$4 of the correct answer Approach: Find YTM of bond A and use it to compute price of bond B, since they have the same YTM YTM of bond A: N = 8 years × 1 coupon per year = 8 PV = -1,050.27 PMT = par × coupon rate ÷ # coupons per year = 1000 × 6.5% ÷ 1 = 65 FV = 1000 END mode Enter 8 -1,050.27 65 1000 N I% PV PMT FV Solve for 5.70 I% = YTM ÷ # coupons per year = YTM ÷ 1 So YTM = I% × # coupons per year = 5.70% × 1 = 5.70% YTM for bond A = 5.70 percent, so for bond B N = 8 years × 1 coupon per year = 8 I% = YTM ÷ # coupons per year = 5.70 ÷ 1 = 5.70 PMT = par × coupon rate ÷ # coupons per year = 1000 × 7.4% ÷ 1 = 74.00 FV = 1000 END mode Enter 8 5.70 74 1000 N I% PV PMT FV Solve for -1,106.83 The value of bond B is \$1,106.83 (answer may differ slightly due to rounding I%)
#11. Bonds issued by Mindy’s Mending have a par value of \$1000, were priced at \$1,220.00 six months ago, and are priced at \$1,140.00 today. The bonds pay semi-annual coupons and just made a coupon payment. If the bonds had a percentage return over the past 6 months (from 6 months ago to today) of -2.10%, then what is the current yield of the bonds today?