What is the price of the bond at issuance

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Reference no: EM132465615

Application of TVM-the effect of time on bond prices: Initially, bonds can trade at par, discount, or premium, but all bonds eventually approach the face value at the maturity. How so? First consider a 5-year zero-coupon bond with YTM of 5% and face value of $100.

a. What is the price of the bond at issuance? Write out the bond valuation equation.

b. What is the price of the bond 2 years later? Write out the bond valuation equation.

c. By comparing your answers from Part a and b, what do you think is driving the change in the zero-coupon bond price over time?Now, let's consider a 5-year annual coupon bond with YTM of 5% and face value of $100. Assume annual coupon rate of 10%.

d. What is the price of the bond at issuance (P0)? Is this a par, discount, or premium bond?

e. What is the price of the bond immediately before(P1, before) it makes its first coupon payment? Compute the change in bond price (Δ1=P1, before -P0). What is driving the change?

f. What is the price of the bond immediately after (P1, after) it makes its first coupon payment? Compute the change in bond price (Δ2=P1, after -P1,before). What is driving the change?

g. Compare the size of Δ1 and Δ2. Over time, how does the bond price change in relation to the face value of $100?

This is a very hard one I cannot seem to figure out.

Reference no: EM132465615

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