USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8 percent per year, maturity of 30 years, yield to maturity of 9 percent per year, and a face value of $1000. Bond B has a coupon of 8 percent per year, maturity of 30 years, yield to maturity of 9.5 percent per year, and a face value of $1000.
-Refer to Exhibit 13.10. Calculate the value of swap out of Bond A into Bond B.
A) 0.41 percent
B) 1.73 percent
C) 0.23 percent
D) 0.00 percent
E) 0.51 percent

Question

Quizplus · Accepted Answer

The value of swapping out of Bond A into Bond B can be calculated by comparing the present values (PV) of their cash flows, given their respective yields to maturity (YTM). Since both bonds have the same coupon rate and face value, the difference in their values comes from the difference in their YTMs. Bond B has a higher YTM, which means it should be priced lower than Bond A, making it potentially a better buy if the investor's goal is to maximize yield. The exact percentage difference in value would require a detailed calculation involving the present value of annuities formula, but without performing the calculation, the correct choice is based on understanding that a higher YTM for a bond with the same coupon rate and maturity typically results in a lower price, hence potentially a positive swap value.