An investor is considering the purchase of security X. which matures in 10 yrs with a par value of $1,000. During the first 5 yrs, X has 6 % semi annual coupon with quarterly payments. During the remainining 5 yrs, X has a 8% coupon with quarterly payments. The face value is paid at maturity. A second 10 yr security, Z has a 6% semiannual coupon and is selling at par. Assuming that X has the same period BEY as Z,@what is the price of security X? a $943 b $1,009 c 1,036 d 1,067
d?
Ill go with D
did you just guess? Given security Z is selling at par, its BEY = coupon rate = 6% Given X has 8% quarterly coupons in its final 5 yrs, i know the bond must trade at a premium to par. hence answer is either B,C or D. How do i narrow it down further?
i did a quick calculation took discount rate 1.5 (6/4) first 5 years use pmt=20 n=20 i/y=1.5 fv=1000 cpt pv the pv becomes fv and do calc for pmt=15 i got 1063- because i did not use exact calculation is that correct?
I took the present value of the cash flows for the first 5 years and added it to the present value of the 2nd half of cash flows. The PV of the second half of the cash flows is actually 5 years ahead, so you have to discount it back another 5 years.
yYou guys are so on the money.