Question

Bond X is noncallable and has 20 years to maturity, a 7% annual coupon, and a $1,000 par value. Your required return on Bond X is 12%; 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 10.5%. How much should you be willing to pay for Bond X today? (Hint: You will need to know how much the bond will be worth at the end of 5 years.) Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

1000 Bond Par value Coupon rate Required return Years to maturity 7% 12% 201 NM + DONE Interest rate at end of 5th year Bond value at end of 5th year 10.50% $741.22 Bond current value at required return $672.92

Cell reference -

J15 B FNM + Bond Par value Coupon rate Required return Years to maturity 1000 0.07 0.12 20 Interest rate at end of 5th year Bond value at end of 5th year 0.105 =PV(C7,15,-C3*C2,-C2,0) Bond current value at required return =PV(C4,5,-C3*C2,-C8,0) F 12 121

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.