An investor is considering the purchase of Security X, which matures in 10 years with a par value of $1,000. During the first five years X has a 6% coupon with quarterly payments. During the remaining five years X has an 8% coupon with quarterly payments. The face value is paid at maturity. A second 10-year security, Security Z, has a 6% semi-annual coupon and is selling at par. Assuming that security X has a same BEY as Z, What is the price of Security X A) $943 B) $1,009 C) $1,036 D) $1,067
IMO, For security Z, N=20, PV=-1000, FV = 1000, PMT=30, i=3%, BEY 2*3=6%. For Bond X, For 5-10 years – Value at t=5, N=20, FV=1000, PMT=20, i=1.5%, PV=1085.84 For 0-5 years - Value at t=0, N=20 , FV = 1085.84, PMT =15, i=1.5%, PV = 1063.73 …???
is it d?
I say D too
goel_ar I have same calculations as you
florinpop are you getting the exact same number or a lil diff… my calculations got me 1070.86
reema depends if you use 6% market rate or not. if you convert 6% effective compounded 2/year to a nominal one would be 5.91. if you use that I have 1070.71 if you use 6% as discounting rate then it’s 1063.7
Your answer: D was correct! The bond equivalent yield rate on the par bond (Z) is 6% or a 3% semiannual rate. The equivalent quarterly rate, 1.031/2 -1 = 0.014889. Security X makes 20 quarterly payments of $15 and 20 quarterly payments of $20. We need to use the cash flow function as follows: CF0 = 0; CF1 = 15; F1 = 20; CF2 = 20; F2 = 19; CF3 = 1,020; F3 = 1; I/Y = 1.4889; CPT ¨ NPV = $1,067.27. Note that CF3 contains the final quarterly payment of $20 along with the $1,000 face value payment.