Q- Let's assume you are observing two risk-free bonds, A and B, with two and three remaining to maturity, respectively, and a face value of $ 1,000. The first bond has a 9% coupon rate, and the second one is 10%. Both the bonds pay coupons annually. You also find that one year zero coupon government bond with a face value of $100 is trading at $94.34, two-year zero coupon bond trading at $87.84, and three-year zero coupon bond trading at $79.

 

a) Let's say currently the market price of the bond A is 10% less than its fair value whereas the market price of the bond B is 10% higher than its fair value. At what price are these bonds currently trading at?                                                                 

                                                     

b) Compute the yield to maturity for both bonds. Comment on your results.  

 

c) Let's say a Treasury bond was issued on 15 January 2022 and matures on 15 January 2024. The bond's face value is $ 1,000 and pays coupons of 10% annually? If this bond trades at its fair value today, i.e. 23^rd May 2022 and you decide to buy this bond, estimate the price that you will have to pay to the seller of the bond.

Answer rating: 100% (QA)

a We know that the face value of both bonds A and B is 1000 and bond A has a coupon rate of 9 and two years remaining until maturity while bond B has ... View the full answer