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Intro The University of California has two bonds outstanding. Both issues have the same credit rating, a face value of $1,000 and a coupon rate
Intro The University of California has two bonds outstanding. Both issues have the same credit rating, a face value of $1,000 and a coupon rate of 5%. Coupons are paid twice a year. Bond A matures in 1 year, while bond B matures in 30 years. The market interest rate for similar bonds is 9%. - Attempt 2/6 for 5 pts. Part 1 What is the price of bond A? 953.84 Correct We need to calculate the present values of 2 cash flows even though the bond has only 1 year to maturity, since bonds typically pay interest semi-annually. As a result, we also have to adjust the YTM (.e. discount rate or the market interest rate) to half the given market interest rate and also find the coupon payment as 1/2 * $1,000 * coupon rate. YTM 0.09 6-month (i.e. semi-annual) periodic discount rate = = 0.045 2 2 0.05 1,000 6-month (i.e. semi-annual) coupon payment = = 25 2 25 1,025 PA = + = 962.55 1 + 0.045 (1 + 0.045) Attempt 4/6 for 0 pts. Part 2 What is the price of bond B? 0+ decimals Submit 18 Attempt 1/6 for 10 pts. Part 3 Now assume that yields increase to 12%. What is the price of bond A? 0+ decimals Submit | Attempt 1/6 for 10 pts. Part 4 What is now the price of bond B? 0+ decimals Submit
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