Question

A bond offers a coupon rate of 5%, paid annually, and has a maturity of 6 years. The current market yield is 4%. Face value is $1,000. If market conditions remain unchanged, what should the price of the bond be in 1 year? Assume the market yield remains unchanged.

Answer 1

The price of the bond in 1 year would be $1,041.68.

Step-by-step explanation:

The price of the bond in 1 year can be calculated using the present value formula. The formula is:

PV = C/(1+r) + C/(1+r)^2 + ... + C/(1+r)^n + F/(1+r)^n

Where PV is the present value or price of the bond, C is the coupon payment, r is the market yield rate, n is the number of years to maturity, and F is the face value of the bond.

In this case, the coupon payment (C) is $50 ($1,000 x 5%), the market yield rate (r) is 4%, the number of years to maturity (n) is 5 (6 years - 1 year), and the face value (F) is $1,000.

Plugging these values into the formula, we get:

PV = 50/(1+0.04) + 50/(1+0.04)^2 + 50/(1+0.04)^3 + 50/(1+0.04)^4 + 50/(1+0.04)^5 + 1,050/(1+0.04)^5

Simplifying this equation, the price of the bond in 1 year would be $1,041.68.