Question

(Bond Valuation)

Bond X is noncallable and has 20 years to maturity, an 8% 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 7.5%. 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.

$ =

Answer 1

Bond X is noncallable and has 20 years to maturity, an 8% 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 is given as : Value of bond at the last of five years = Value at that time of future dividends include face value

= 1,000x8%xPVAF(7.5%, 15 years) + 1,000xPVF(7.5%, 15 years)

= 80x8.8271 +1,000x0.338

=706.168 + 1000x0.338

= 706.168 +338

= $1,044.168

amount to paid this day  = present value of all receivables

= 80xPVAF(9%, 5 years) + 1,044.168xPVF(9%, 5 years)

= 80x3.890 +1,044.168x0.650

= 311.2 + 1,044.168x0.650

=311.2 +678.7092

= $989.9092

therefore, cash to be paid is $989.91