Question

eBook Problem Walk-Through The 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 8%; if you bu 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 5.5%. 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 years.) Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

First, we need to find the value of the bond in 5 years, for that we need to put the following values in the financial calculator:

N = 15;

I/Y = 5.5;

PMT = 7%*1000 = 70;

FV = 1000;

Press CPT, then PV, which gives us -1150.56

So, Price in 5 years is $1,150.56;

Now on basis on this price, we can find the price today, for that we need to put the following values in the financial calculator:

N = 5;

I/Y = 8;

PMT = 7%*1000 = 70;

FV = 1150.56;

Press CPT, then PV, which gives us -1062.54

So, Price today is $1,062.54;