Question

A 20-year, $1,000 par value bond has a 6.5% annual payment coupon. The bond currently sells for $950. If the yield to maturity remains at its current rate, what will the price be 5 years from now

Answer 1

Step-by-step explanation:

First we need the calculate the YTM

Use following Following formula

Price of the bond = C x ( 1 - ( 1 + r )^-n / r + F / ( 1 + r )

Where

C = Coupoon Payment = $1,000 x 6.5% = $65

n = numbers of periods = 20

F =Face value = $1,000

Priec of the bond = $950

r = YTM = ?

Placing values in the formula

$950 = $65 x ( 1 - ( 1 + r )^-20 / r + $1,000 / ( 1 + r )

r = 6.971%

Now calculte the price after 5 years

n = numbers of periods = 20 - 5 = 15 years

r = Yield to maturity = 6.971%

Placing values in the formula

Price of the bond = $65 x ( 1 - ( 1 + 6.971% )^-15 / 6.971% + $1,000 / ( 1 + 6.971% )

Price of the bond = $957.02