Bond problem term structure different YTM

AIM911

New member
Joined
Jun 16, 2008
Messages
1
A Government of Canada bond was issued on January 1st, 2001 with a yield-to-maturity of 11%. At the time the term structure was flat. The bond’s coupon rate is 10%. The bond was issued on January 1st, 2001 and will mature on January 1st, 2014. The annual coupons are due on January 1st of each year until maturity. You want to purchase the bond on January 1st, 2008.

c) Calculate your purchase price for the bond on January 1st, 2008. The term structure of interest rates on January 1st, 2008 was as follows:

Years to Maturity | Yield to Maturity
1 | 5%
2 | 6%
3 | 6.5%
4 | 7.0%
5 | 7.5%
6 | 8.0%


I am not sure on how to start with this question because its very different from the other questions

Ty for your help
 
After googling to try and "understand" this new (to me) animal, I have a feeling it works
a bit like this (but could be way off!):
- the initial "yield-to-maturity of 11%" is useless information
- the purchase price (p) is an amount that is expected to earn 8% annually for 6 years; p(1.08^6)
- the 1st coupon (Jan 1/2009) is expected to earn 7.5% annually for 5 years; 10000(1.075^5)
- similarly, Jan 1/2010 to Jan 1/2013: 10000(1.07^4), 10000(1.065^3), 10000(1.06^2), 10000(1.05)
- the last flow is 10,000 + 100,000 (Jan 1/2014)

Future value of above flows (Jan 1/2009 to Jan 1/2014) works out to 171,279.75

So p(1.08^6) = 171279.75
p = 107935.30

Question: since YOU're the one being taught this (in class, I presume), then WHY can you not
supply more "background info"? Has this problem been thrown at you with NO explanation and
with NO example(s)?
YOU could at least have contacted an investment firm for information: were you expecting us
to do that for you?!

Note: the reason I'm using the coupons the way I did is what I understood (could be wrong)
from googling this stuff: coupons "apparently" are treated as new bonds with zero-coupons.
 
Top