BOND VALUATION Bond X is noncallable and has 20 years to maturity, a 9% annual c
ID: 1172575 • Letter: B
Question
BOND VALUATION
Bond X is noncallable and has 20 years to maturity, a 9% annual coupon, and a $1,000 par value. Your required return on Bond X is 9%; 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.
Explanation / Answer
Value of bond at the end of year 5 = Coupon * (1 - (1+yield rate)^(-year remaining))/ yield rate + Face value of bond/(1+ yield rate)^(year remaining)
Coupon will be 9% of 1000 = $90
yield rate = 10.5%
year remaining = 15 years
Value of bond at the end of year 5= 90 * ( 1 - 1.105^(-15))/.105 + 1000/(1.105)^15
= 665.44 + 223.65
= $889.09
value of bond today = 90* (1 - 1.09^(-5))/.09 + 889.09/1.09^5
= 350.07 + 577.85
= $927.92
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.