Question

g 2018: US Bond A is issued at par with annual coupon of 2% and maturity of 5 years with face value of $1,000. 2019: Interest rates increase in the market 2020: US Bond B is issued at par today with annual coupon of 5% and a maturity of 3 years with face value of $1,000.What should the price of Bond A be today, 2020, with 3 years left to maturity, so that its yield to maturity is equal to the yield to maturity on Bond B

Answer 1

$918.48

Step-by-step explanation:

price of bond A after the interest rate increased to 5% and the time to maturity is 3 years:

PV of face value = $1,000 / (1 + 5%)³ = $863.84

PV of coupon payments = $20 x 2.7232 (PV annuity factor, 5%, 3 periods) = $54.46

Market value of bond A = $863.84 + $54.46 = $918.48

Since the market rate is higher than the coupon rate, the bond will sell at a discount.