Question

Bond J and Bond K are both zero-coupon, $1,000 face value bonds that have the same YTM. Bond J has a term of 8 years and Bond K has a term of 13 years. If the price of Bond J is $634.56, what is the price of Bond K

Answer 1

The price of Bond K is approximately $507.46.

Step-by-step explanation:

To find the price of Bond K, we can use the same formula used to calculate the price of Bond J. The formula is:

Price = Face Value / (1 + YTM)^Term

Since Bond J has a term of 8 years and a price of $634.56, we can plug these numbers into the formula:

634.56 = 1000 / (1 + YTM)^8

Solving for YTM, we find that YTM ≈ 0.0612.

Now we can use this YTM and the term of Bond K (13 years) to calculate its price:

Price of Bond K = 1000 / (1 + 0.0612)^13 ≈ $507.46