Question

Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1,000 par value. Your required return on Bond X is 8%; if you buy it, you plan to hold it for 5 years. You (and the market) have expectations that in 5 years, the yield to maturity on a 15-year bond with similar risk will be 8.5%. How much should you be willing to pay for Bond X today

Answer 1

$954.54

Step-by-step explanation:

The price of the bond today is the present value of the promised cash inflows of coupon payment and repayment of face value which is computed using fv formula in excel below:

Price in 5 years time:

=-pv(rate,nper,pmt,fv)

rate is 8.5% in 5 years' time

nper is 15 years in 5 years' time

pmt is the annual coupon=$1000*9%=$$90

fv is the face value of $1000

=-pv(8.5%,15,90,1000)=$ 1,041.52

Price today:

=-pv(8%,20,90,1,041.52)=$954.54