Independent solution

How to solve this Bond Pricing and Yields question

Setup

Setup

Price Bond A using half-year coupon 45, yield 4.2%, and 30 periods.

PA=45a30‾∣0.042+1200(1.042)−30P_A=45a_{\overline{30}|0.042}+1200(1.042)^{-30}

Model

Model

Equate Bond B's quarterly cash-flow price to Bond A's price.

PA=20a4n‾∣0.021+1376.69(1.021)−4nP_A=20a_{\overline{4n}|0.021}+1376.69(1.021)^{-4n}

Compute

Compute

The common price is 1108.85, and solving gives 4n = 48.0022 quarters.

n=12.00055446n=12.00055446

Answer

Answer

Bond B has a 12-year term, selecting choice A.

n=12(A)\boxed{n=12\quad\text{(A)}}

Calculator reproduction

BA II Plus keystrokes

Check END/BGN, period, sign, TVM, and cash-flow setup

  1. 2ND · CLR TVM · 30 · N · 4.2 · I/Y · 45 · PMT · 1200 · FV · CPT · PVPV = -1108.85
  2. 2.1 · I/Y · 20 · PMT · 1376.69 · FV · CPT · NN = 48Divide the quarterly period count by four.