Brown Enterprises’ bonds currently sell for $1,025. They have a 9-year maturity,

Question

Brown Enterprises’ bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is the price 1 year from now if YTM remains the same overtime? A.  1025.00 B.  1022.96 C.  1105.00 D.  1080.00 E.  1000.00 Brown Enterprises’ bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is the price 1 year from now if YTM remains the same overtime? A.  1025.00 B.  1022.96 C.  1105.00 D.  1080.00 E.  1000.00

Explanation / Answer

Answer is $1,022.96

Calculation of YTM:

Par Value = $1,000
Current Price = $1,025
Annual Coupon = $80
Time to Maturity = 9 years

Let annual YTM be i%

$1,025 = $80 * PVIFA(i%, 9) + $1,000 * PVIF(i%, 9)

Using financial calculator:
N = 9
PV = -1025
PMT = 80
FV = 1000

I/Y = 7.61%

Annual YTM = 7.61%

Calculation of price 1 year from now:

Par Value = $1,000
Annual Coupon = $80
Time to Maturity = 8 years
Annual YTM = 7.61%

Price after 1 year = $80 * PVIFA(7.61%, 8) + $1,000 * PVIF(7.61%, 8)
Price after 1 year = $80 * (1 - (1/1.0761)^8) / 0.0761 + $1,000 / 1.0761^8
Price after 1 year = $1,022.96

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