9-3 Bond Valuation 9-6 Bonds with Semiannual Coupons Problem 9-16 Bond valuation

Question

9-3 Bond Valuation 9-6 Bonds with Semiannual Coupons Problem 9-16 Bond valuation Bond is noncallable and has 20 years to maturity, a 7% annual coupon, and a $1 000 par value Your require return on Bond S 11%, and f you buy ou an to t or 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 9%. 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.) Round your answer to the nearest cent.

Explanation / Answer

First we will calculate price of bond by end of 5 years

N = 15 years

Coupon Rate = 7%

Coupon payment = 70

FV = 1,000

I = 9%

Using Financial Calculator:

PV = 889.57

Now we will calculate PV at T = 0

FV = 889.57

Coupon payment = 70

I = 11%

N = 5 years

Using Financial Calculator:

PV = 815.09

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