Independent solution

How to solve this Bond Pricing and Yields question

Setup

Setup

Write Bond A's 40-period price with coupon 350 and redemption 1.1 times price.

PA=350a40‾∣0.025+1.1PA(1.025)−40P_A=350a_{\overline{40}|0.025}+1.1P_A(1.025)^{-40}

Model

Model

Solve P_A and redemption, then reduce the price by 158.33 for Bond B.

R=1.1PAR=1.1P_A
PB=PA−158.33P_B=P_A-158.33

Compute

Compute

The values are P_A = 14883.25, R = 16371.57, and P_B = 14724.92. Solving P_B over m half-years gives m = 48.0003.

PB=350am‾∣0.025+R(1.025)−mP_B=350a_{\overline m|0.025}+R(1.025)^{-m}
m=48.00029453m=48.00029453

Answer

Answer

Forty-eight half-years equal 24 years, selecting choice C.

n=24(C)\boxed{n=24\quad\text{(C)}}

Calculator reproduction

BA II Plus keystrokes

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

  1. 2ND · CLR TVM · 2.5 · I/Y · 14724.92 · +/- · PV · 350 · PMT · 16371.57 · FV · CPT · NN = 48Divide the half-year period count by two.