Question

21. You have been asked to estimate the value of a 10-year bond with a coupon that will be low initially but it is expected to grow later in the bond's life. The coupon is expected to be 5% of the face value of the bond (which is $ 1000) for the first 5 years, and will increase by 1% every year for the next 5 years ň the coupon rate w year 8,9% in year 9 and 10% in year 10. Estimate the value of this bond. ill be 6% in year 6,7% in year 7,8% in

Answer 1

Value of the bond is $1064.755
Value of the bond =1000 + (1000/(1.05+1.05^2+1.05^3+1.05^4+1.05^5+1.06^6+1.07^7+1.08^8+1.09^9+1.1^10))