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 4%. 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 12%.

Attempt 1/6 for 10 pts.

Part 1

What is the price of bond A?

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 (i.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.

6-month (i.e. semi-annual) periodic discount rate = YTM2=0.122=0.06

6-month (i.e. semi-annual) coupon payment = 0.041,0002=20

PA=201+0.06+1,020(1+0.06)2=926.66

Attempt 1/6 for 10 pts.

Part 2

What is the price of bond B?

Submit

Attempt 1/6 for 10 pts.

Part 3

Now assume that yields increase to 15%. What is the price of bond A?

Submit

Attempt 1/6 for 10 pts.

Part 4

What is now the price of bond B?