Independent solution

How to solve this Bond Pricing and Yields question

Setup

Setup

Convert Bond A's annual effective yield to a half-year rate and price its ten coupons.

jA=(1.04)1/2−1j_A=(1.04)^{1/2}-1
PA=25a10‾∣jA+1000(1+jA)−10P_A=25a_{\overline{10}|j_A}+1000(1+j_A)^{-10}

Model

Model

Reduce that price by 100 and solve Bond B's annual cash-flow equation.

PB=PA−100P_B=P_A-100
PB=30a5‾∣iB+1000(1+iB)−5P_B=30a_{\overline5|i_B}+1000(1+i_B)^{-5}

Compute

Compute

The prices are 1046.72 and 946.72; the Bond B yield root is 4.203615%.

iB=0.0420361519i_B=0.0420361519

Answer

Answer

Bond B yields approximately 4.20% annually, selecting choice B.

iB≈4.20%(B)\boxed{i_B\approx4.20\%\quad\text{(B)}}

Calculator reproduction

BA II Plus keystrokes

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

  1. 2ND · CLR TVM · 10 · N · 1.980390 · I/Y · 25 · PMT · 1000 · FV · CPT · PVPV = -1046.72
  2. 5 · N · 946.72 · +/- · PV · 30 · PMT · 1000 · FV · CPT · I/YI/Y = 4.2036