Question

A 25-year maturity mortgage-backed bond is issued. The bond has a par value of $10,000 and promises to pay an 8-percent annual coupon. At issue, bond market investors require a 12-percent interest rate on the bond. Assume that 20 years after the bond is issued, bond market investors require a 15-percent interest rate on the bond. What is the market price of the bond

Answer 1

Bond Price after 20 years = $7653.4914 rounded off to $7653.49

Step-by-step explanation:

To calculate the quote/price of the bond today, which is the present value of the bond, we will use the formula for the price of the bond. As the bond is an annual bond, the annual coupon payment, number of periods and annual YTM will be,

Coupon Payment (C) = 10000 * 0.08 = $800

Total periods remaining (n) = 5

r or YTM = 0.15 or 15%

The formula to calculate the price of the bonds today is attached.

Bond Price = 800 * [( 1 - (1+0.15)^-5) / 0.15] + 10000 / (1+0.15)^5

Bond Price after 20 years = $7653.4914 rounded off to $7653.49