Answer :
Answer:
a) 7% as their market price will adjsut to give the same yield as the market
b) bond P = -10.17
bonds D = 10.07
Explanation:
we have to calcualte the price variation of the bonds from now (10 years to maturity) to next year (9 years)
Bond P
[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]
C 90.000
time 10
rate 0.07
[tex]90 \times \frac{1-(1+0.07)^{-10} }{0.07} = PV\\[/tex]
PV $632.1223
[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]
Maturity 1,000.00
time 10.00
rate 0.07
[tex]\frac{1000}{(1 + 0.07)^{10} } = PV[/tex]
PV 508.35
PV c $632.1223
PV m $508.3493
Total $1,140.4716
then, at time = 9
[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]
C 90.000
time 9
rate 0.07
[tex]90 \times \frac{1-(1+0.07)^{-9} }{0.07} = PV\\[/tex]
PV $586.3709
[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]
Maturity 1,000.00
time 9.00
rate 0.07
[tex]\frac{1000}{(1 + 0.07)^{9} } = PV[/tex]
PV 543.93
PV c $586.3709
PV m $543.9337
Total $1,130.3046
Capital loss: 1,130.30 - 1,140.47 = -10.17
We repeat the process for bond D
[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]
C 50.000
time 10
rate 0.07
[tex]50 \times \frac{1-(1+0.07)^{-10} }{0.07} = PV\\[/tex]
PV $351.1791
[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]
Maturity 1,000.00
time 10.00
rate 0.07
[tex]\frac{1000}{(1 + 0.07)^{10} } = PV[/tex]
PV 508.35
PV c $351.1791
PV m $508.3493
Total $859.5284
[tex]C \times \frac{1-(1+r)^{-time} }{rate} = PV\\[/tex]
C 50.000
time 9
rate 0.07
[tex]50 \times \frac{1-(1+0.07)^{-9} }{0.07} = PV\\[/tex]
PV $325.7616
[tex]\frac{Maturity}{(1 + rate)^{time} } = PV[/tex]
Maturity 1,000.00
time 9.00
rate 0.07
[tex]\frac{1000}{(1 + 0.07)^{9} } = PV[/tex]
PV 543.93
PV c $325.7616
PV m $543.9337
Total $869.6954
Capital gain: 869.70 - 859.53 = 10.07