Question
Consider price quotes and characteristics for two different bonds: Bond A Bond B Par value $100 $100 Coupon Payment Annual Annual Maturity 3 years 3
Consider price quotes and characteristics for two different bonds:
| Bond A | Bond B | |||
| Par value | $100 | $100 | ||
| Coupon Payment | Annual | Annual | ||
| Maturity | 3 years | 3 years | ||
| Coupon Rate | 8% | 5% | ||
| Yield to Maturity | 10.75% | 10.85% | ||
| Price | $93.25 | $85.67 | ||
At the same time, you observe the spot rates for the next three years:
| Term | Spot (Zero-Coupon) Rates | |
| 1 year | 6% | |
| 2 years | 8% | |
| 3 years | 11% | |
Demonstrate whether the price for either of these bonds is consistent with the quoted spot rates. Under these conditions, recommend whether Bond A or Bond B appears to be the better purchase. Do not round intermediate calculations. Round your answers to the nearest cent.
The non-arbitrage price of Bond A: $
The non-arbitrage price of Bond B: $
Which Bond, A/B, appears to be the better purchase?
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Financial Analysis And Modeling Using Excel And VBA
Authors: Chandan Sengupta
2nd Edition
047027560X, 978-0470275603
